Does a Property Index Tracker Count as Equities?

_pete_

I've been working with an IFA to put together a pension portfolio based on index trackers. He has suggested that 13% of my investments should be in Property - which I'm happy with. He has given me the option of investing this 13% either in a property tracker fund (the Blackrock Global Securities Equity Tracker, which has a 0.24% annual charge) or in the Henderson UK Property Unit Trust, which has a 0.87% annual charge.

My concern is that the Blackrock fund is an equity fund with a KIID risk/reward rating of 6. This means that 73% of my portfolio is in equities (I wanted 60% in equities). On the other hand, the Henderson fund has a higher annual charge.

I'd appreciate any views/comments.

Sobryma

The risk with a physical fund other than investment trust is illiquidity, several went through the floor in 2008 and were locked up by fund providers; equity index funds will follow equity market down (higher corelation).

Blackrock is more global so not such a UK focus - which you will already be exposed to as you presumably live here/own non commercial property.

13% is quite a chunk but depends on how much is in risk assets. There's an argument that you already have exposure through broad market (as with commodities).

I hold around 5% in a 60/40 portfolio with Bestinvest some in Henderson's but my work pension is zero to property just global equities. Hale (Smarter Investing) allocates 10% of risk assets to property in his model portfolio whereas Lars Kroijer (Investing Demystified) allocates zero.

No right or wrong just different risks.

dunstonh

Property share is higher risk (typically right near the top of conventional unit linked funds). Physical property is much lower risk. Physical property funds will be more expensive than property share funds but you shouldnt really be comparing the two directly.

IMO, it was a bad move a few years back to put property share and physical property into the same sector. It was much better when property share was in the specialist sector.

You wont get a physical property index tracker though. So, you are going to have to break your rules somewhere. If you want to go with property share, the IFA should have some way to measure the volatility risk of the portfolio and adjust it with bonds to make sure it remains within your acceptable limits (not picking 60% as that doesnt really mean anything beyond a quick and dirty comparison)

_pete_

Thank you for the very helpful observations. The principle behind my IFA recommending property in my portfolio was that he is keen for me to have a diverse range of investments with low correlations to one another.

I'm wondering, however, whether a property fund really is a necessary part of my portfolio. About 60% of my investments are allocated to a wide range of equity index trackers, 22% in gilts and bonds, 5% in cash. Might I be better spreading the 13% that is currently earmarked for property equally across the other funds? I'm aware that, for example, the Vanguard Life Strategy 60 does not allocate any money to property directly.

So, the key question is: does property really add much value to an otherwise well-diversified portfolio?

dunstonh

I'm wondering, however, whether a property fund really is a necessary part of my portfolio.

Yes it is. Especially when many consider equities high and bonds high. Property gives you another class that performs differently to equities and bonds (and cash)

So, the key question is: does property really add much value to an otherwise well-diversified portfolio?

yes.

le_loup

Don't forget that you (probably) have a large amount invested in property already - your house!

kidmugsy

If you want to diversify, why not hold 5%-10% in gold? There are SIPP providers who will allow you to own gold bullion. It's another asset that (you hope) will not correlate highly with shares and bonds.

Sobryma

I plugged the funds into Trustnet comparison tool; compared to L&G Global 100 the Blackrock fund has a corelation of 0.73, whereas the Henderson fund has a corelation 0f 0.11 - so the physical propert fund is much less corelated to equities. Treat with a pinch of salt as corelation can and does change.

Porcupine

There's some property ETFs - iShares UK Property UCITS ETF, which is a tracker of REITs, and a selection of iShares Property Yield UCITS ETFs of various locations.

If they're tracking a bundle of REITs, does that make them equity investments or indirect physical property? They aren't property shares like housebuilders, on the other hand there's quite a bit of voodoo between you and the bricks. Debt is the biggie that's not always obvious.

Conversely the closed-ended fund does seem to me to be a more sensible way to do property than an open-ended fund which might be forced to sell up at the wrong time.

_pete_

Thanks again for the helpful and clear suggestions. It seems that:

(a) property needs to be part of my portfolio as one way of maximising the diversity of my asset allocation;

(b) the Blackrock fund does not appear to achieve that particularly well, whereas the Henderson fund does.

So, does the Henderson fund look like a good bet, or are there others which might be more sensible?

....or, a better question might be:

How do you choose which fund to invest in, given that there may be several funds in a particular sector and that past performance is not a guide to future performance? What information do you consider?

Sobryma

_pete_ wrote: »

How do you choose which fund to invest in, given that there may be several funds in a particular sector and that past performance is not a guide to future performance? What information do you consider?

I would look to independent ratings - like
Bestinvest (incl. Managers index); Citywire (funds and managers) and Morningstar; Trustnet (IFA advisor listing/FE rating)...........maybe H-L