There are two counter arguments to investing:
You should never have all your eggs in one basket, and diversification works for you as a stabiliser to your investment risk.
The other is that diversification is for those who don’t know what they are doing.
The second came from Warren Buffet, so he can probably say that. Furthermore, losses to him don’t mean he wont be able to get the kids an ice cream after their chips, so most of us fall squarely into the first camp.
In behind your pensions, ISA’s and investment plans, are a range of investments which are set to provide the very best returns, but also to stabilise the investment in times of ‘high seas’.
A manager will diversify across equities (stocks and shares), bonds, cash, overseas equities and property as an example.
The theory is, that one provides a counter balance to the other, so as to avoid ‘investment sickness’ or worse still, being caught with no lifeboats.
In some market conditions there are no places to hide, and your investments roll with the waves, but diversification avoids serious sways or even capsize.
Some investors, like Buffet, have the courage of their convictions and potentially go full speed ahead into the Ocean. However, on the week that is the anniversary of the maiden voyage of the Titanic, it’s worth understanding hubris in our investments.
Normal conditions mean a normal return, but these are not normal times.
For those investors overly exposed to property, Brexit and liquidity has chopped the water.
If you are out at sea in this boat, there are challenges. Whilst returns have been healthy due to cheap mortgages and bubbly rents, the distress on retail as well as tax changes, have been trumped with the implications under Brexit, and in particular cross border deal making.
A good manager will obviously have diversified within a property fund away from retail and potentially into the market that is causing some of the retail stress.
The boom in online shopping has driven the need for easily accessible warehouse facilities where speed of access is the key. Other areas that have done well are logistics space which is seen as the new retail, where vacancy rates are at an all time low, and demand is soaring.
Consider that many countries in Europe still only have less than 10% online retail, you can see the future demand. Come what may, in a recession, people will still look for the cheapest possible deal, and the retail high street is not necessarily at the tip of your tongue for price competitiveness.
Whilst their prices don’t sway like equities, property funds do however, carry significant risk.
Brexit is an obvious one where investors tried to sell out of property funds but those funds suspended trading immediately as they could not sell buildings quickly enough to deal with client sales.
When the funds returned to normal, prices had plummeted given the mass of properties awaiting speedy sale. Supply and demand altered overnight. In the potential dawn of a hard Brexit, this will be magnified, indeed December’s outflows near the post Brexit vote exodus.
Aberdeen Asset Management for example had to write down 25% of its portfolio in value the month after the Brexit vote.
In October last year, the FCA announced that funds would be allowed to suspend trading quicker as soon as there was a concern regarding 20% of their portfolio, thereby locking investors in.
The upside is stability. The downside is you can’t enjoy its value, like sitting on the outside deck of a ship in the dark.
Managers could respond by holding more liquid assets in their property fund, but that would bring with it both potential fluctuation if the held listed securities in property, or in the case of holding cash, returns of less than inflation.
If you are exposed to the securities, you've not diversified and instead are holding more equities – that’s a lopsided boat.
Property managers currently hold circa 20% of their property funds in cash, watering down returns to the end investor.
There are cheaper ways to hold cash.
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.
For advice on investing , please call 01872 222422 or visit wwfp.net.