Building an investment/pension portfolio is undoubtedly an art. The psychological magnetism of the fear of losing out, the thought of buying when a fund is ‘hot’ and ‘being with the crowd’, and selling for the opposite reasons, are all barriers to our emotional intelligence, which ensures we lose money.
Twenty years ago, I started diarising every financial prediction from Armageddon to euphoric optimism, and then checked six months later what actually happened. The truth was, the predictions were as useful as a journalist simply trying to get a story published.
Property funds have been under the spotlight for some time, and we wonder if the old saying is true, that when all around you is losing their heads, the bargains arrive.
Property funds have always been an excellent negative correlator in an investment portfolio. The old story of buying a quality ice cream company, and a quality Wellington boot company is the prime example. They will do well all year round, but in an extreme heat, the Wellington boot losses are offset by the gains in the ice cream company – a sort of hedge.
Property is typically low in volatility so it appears lower risk, but in difficult times, it can be virtually impossible to shift, at least at a reasonable price. Property funds carry that risk further, because when investors try to cash in their investments in herds, the manager has to sell some very large assets quickly, thereby driving down the price. How quickly do you sell a shopping centre when no-one wants it?
The B word (Brexit), has exacerbated that problem, and in 2016 many funds chose to ‘gate’ their funds to block access to customer’s money, as they could not liquidate assets quickly enough. This is a particular nuisance to investors but undoubtedly is the correct thing to do, as it protects the fund and marketplace from prices being hammered lower.
Some investment funds are sitting on as much as 30% in cash in case there is an outflow in the event of a no deal B word. That is virtually unprecedented. Some might argue they shouldn’t be charging so much to manage the capital if it is in cash, but moving to cash is doing exactly that – managing the money and protecting the assets.
Outflows from investors worried about a no deal B word reached £366m in July nudging close the record outflows in 2016 as B word was announced.
The regulator moved to protect investors and is daily monitoring property funds asking them to create daily cashflows.
The regulator also moved to assist liquidity by creating new liquidity requirements, which, for me, are like licking a window to create world peace. They just won’t assist with fund liquidity.
The regulator is basically saying you can suspend funds more regularly so managers should therefore be investing more in assets than the cash holdings they have.
Some people believe an investment in property is better via a Real Estate Investment Trust (REIT), but that is misleading if you think you are diversifying your portfolio with negative correlation, as you are not. You are effectively buying shares rather than the physical asset and so you should be fully aware that your portfolio isn’t as diversified as you think.
An opportunity? With the potential no deal B word approaching, assets will be under further pressure, which in many ways creates the opportunity mentioned at the beginning of the column. An oversold, non-sexy asset without liquidity where there are countless millions in cash awaiting is undoubtedly a weighted helium balloon.
It is only when an asset looks very ugly that it looks really attractive.
Avoidance of a no deal B word will mean that overseas investors buying into UK Sterling assets at a weakened Sterling and forced-down in value property will be looking at a big discount. Fund managers sat on 30% in cash no longer need to do so. Simply put, there are a lot more buyers.
Undoubtedly putting illiquid assets in a daily traded vehicle/fund is a mismatch but if you know what you are buying, that’s fine given its benefits.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you have an investment question please call 01872 222422 or visit WWFP.net.Last modified: June 10, 2021