Is leveraged property riskier than small cap?

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I saw a property fund I'm considering for diversity;

http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000S8T0&tab=1

Performance not much different than Vanguard Global small cap, so on that basis alone it's tempting to hold them in equal amounts, and if one crashes and the other doesn't i can pounce

It is prepared to take a net exposure of up to 140%,so it can leverage, But is it riskier than the small cap on that basis? It's borrowing to invest in companies that have their own debt, just to buy an underlying asset (property) that doesn't grow as well, but is more stable.

Certainly less diverse anyway,
But I'd give it small place at least to bulk out the semi emergency fund
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  • BananaRepublic
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    There is only 3 years of data available which is not enough in my view to form an opinion on its own. From memory, small caps tend to do well in good times, but suffer more in crashes. My own experience of small companies is that they are very sensitive to cash flow, and market crashes can send them under when a bigger company might survive. As for property, a quick check with the You Invest fund rankings suggests on the 10 year scale, property ain't so hot. I'd be curious what others have to say.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 22 March 2017 at 12:16AM
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    I saw a property fund I'm considering for diversity;

    Performance not much different than Vanguard Global small cap, so on that basis alone it's tempting to hold them in equal amounts, and if one crashes and the other doesn't i can pounce
    Pounce? Are you some kind of Big Cat king of markets?

    They invest in entirely different things. So of course the returns of the two products will not necessarily be correlated with each other. But the same can be said about lots of global sectors. On several threads you have been told you should not invest in a sole asset class as your entire investment for one goal, because diversity is important. So, it's good that you're finally shopping around. Still, 50/50 sounds like a completely arbitrary split with no thought given. Certainly there are further sectors to consider to build a proper portfolio.

    How did you decide the performance is not much different from some other fund? From the link you gave, the fund has not existed for even four full years. Which is not even half way back to the last market bottom. So on what basis are you performing a meaningful comparison to other funds?
    It is prepared to take a net exposure of up to 140%,so it can leverage
    In their current prospectus and factsheet I didn't spot the exact level up to which they would leverage. Where did you get that from? I'm not disputing it as I don't know enough about the fund, but as a general rule, an open ended fund that loads up with leverage is a bad idea. What happens if everyone decides to redeem?
    Certainly less diverse anyway
    It invests into individually selected real estate investment companies around the world. That's certainly more focused than investing arbitrarily around the world into small companies of all industries with a bias to the larger ones (which is what your smallcap index fund does). That doesn't necessarily create a greater or lesser volatility, if the underlying assets are physical properties soundly selected on the one hand, rather than hopes and dreams haphazardly selected across all business sectors on the other hand, but certainly a different result.
    But I'd give it small place at least to bulk out the semi emergency fund
    If it is, as you suggest, a 40% leveraged property play invested in a wide variety of illiquid assets with the majority of them overseas, it does not sound appropriate to bulk out an emergency fund, even a 'semi' emergency fund.


    I see a couple of holdings in UK and Germany are ones I hold directly myself. However, that's a tiny fraction of their overall portfolio. What did you use to get comfortable that they are making smart decisions?

    The fund is managed by Thames River who have decent performance in their TR Property investment trust - which has a mix of direct UK property and indirect investments across Europe via other investment company vehicles. But this fund is open ended and includes US and Asia so is a different kettle of fish.

    At the time of the Brexit referendum it gained a good chunk over their UK/Europe investment trust, because of a relatively lower allocation to UK (which temporarily suffered post-referendum) and greater exposure to those such as USA with positive currency effects over that particular time period. It's quite possible this could reverse. A key issue is that in the event of sterling strengthening you would get a serious loss in your US-centric 'global smaller companies' fund at the same time as the losses in your 'global leveraged property equities' fund.
  • System
    System Posts: 178,104 Community Admin
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    I think it's because it's not direct property but equities of property companies that it's performing along more equity lines.

    Harder crashes = bigger opportunities ☺ i would always use funds
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    Harder crashes = bigger opportunities ☺ i would always use funds
    Would anyone suggest a new investor to not use funds? Certainly holding the individual underlying properties is implausible, as is holding shares in 5000 global smallcap companies.
  • System
    System Posts: 178,104 Community Admin
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    Bowl - 50:50 as without more knowledge i assume each has an equal chance of crashing and if performance is similar then I'm not diluting performance.

    I got 5 years history from BI:
    https://select.bestinvest.co.uk/fund-factsheets/trresc/fc-real-estate-securities-c-gbp

    (Which is where i got 140% from)
    I googled the index too, but the index does look weaker than the fund so since i could see there were no major recent shocks other than 2008 i just extrapolated
    .What did you use to get comfortable that they are making smart decisions?

    I don't know, i just went on the faith that it seems like it's based on an index, just trying to beat it using leverage, i have read that indexing just piggybacks on everyone elses research, which I'm not going to be able to trump

    And yes, it does bother me how US concentrated it is, I haven't been able to see an equally performing UK property fund to substitute it but UK would certainly be safer for the semi emergency, maybe it's because i need to find a suitable UK index and then a fund that leverages it
  • Malthusian
    Malthusian Posts: 10,980 Forumite
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    The fund is an OEIC and OEICs are only permitted to borrow up to 10% of their assets, and that only temporarily; they cannot use gearing as closed-ended investment trusts can. Where did you get the idea that they can gear up to 40%?
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 22 March 2017 at 12:16PM
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    Apologies in advance if this sounds blunt.
    Bowl - 50:50 as without more knowledge i assume each has an equal chance of crashing and if performance is similar then I'm not diluting performance.

    I guess the thing to do if you don't have much knowledge and are trying to embark on a strategy that only uses two specialist sectors, is to make damn sure you have a lot of knowledge in those sectors.

    Otherwise you should be buying more sectors. Your assumptions are poor.
    I got 5 years history from BI:
    https://select.bestinvest.co.uk/fund-factsheets/trresc/fc-real-estate-securities-c-gbp

    (Which is where i got 140% from)
    Ok, that's an entirely different fund, which invests in UK and Europe and uses a long/short strategy and derivatives to try to enhance returns. Your Morningstar link sent us to the global real estate securities fund which invests globally and does not really seem do that at all, at least not according to the factsheet or prospectus.
    I googled the index too, but the index does look weaker than the fund so since i could see there were no major recent shocks other than 2008 i just extrapolated
    The index for the first fund or the index for the second?

    Extrapolating from a period without major shocks and then using your results to justify the inclusion of the fund in your semi-emergency pot of liquid assets, is a poor way to do your due diligence.
    I don't know, i just went on the faith that it seems like it's based on an index, just trying to beat it using leverage, i have read that indexing just piggybacks on everyone elses research, which I'm not going to be able to trump
    You read the description of that European fund at bestinvest which talks about it taking enhanced long and short positions, active management of risk and volatility and taking significant positions away from the benchmark based on management convictions, and thought "hmm, seems like it's based on an index..."? :)

    I mentioned I had looked at the holdings of the first fund you directed us to, which are shown in the accounts, and recognised a few entities I hold directly myself. They are quite niche specialist holdings. So, that global fund is not really "based on an index" either.
    And yes, it does bother me how US concentrated it is, I haven't been able to see an equally performing UK property fund to substitute it
    Ah, we are back on the first fund now with its high US exposure rather than the second fund you found at bestinvest which doesn't have Global in the name and has zero US holdings.

    Well of course you haven't found an equally performing UK property fund within the time period that one has been going (since 2013), as the US has performed quite differently. An investment in a UK fund that's holding sterling-priced assets has not had the 20% boost that a global fund got on its US holdings or the other positive effects that Asian or European holdings have had when converted back to pounds.
    but UK would certainly be safer for the semi emergency, maybe it's because i need to find a suitable UK index and then a fund that leverages it
    Certain types of domestic property holdings can be a good diversifier to equities and bonds if you are trying to be prepared for a semi emergency. However, trying to find an index of all UK commercial property, and then a fund that leverages it, seems pretty difficult. I don't know if such a thing exists.

    A leveraged tracker of UK REITs would be a niche investment and very high risk due to the effect of discounts and premiums on the underlying holdings (which are themselves generally leveraged) and then adding the leverage on top. I suspect you are on a hiding to nothing if you are trying for something "safer" to use as half your emergency fund.

    I would rethink the plan from scratch, as you have generally been suggested to do with some of your strategies on other threads... :)
  • System
    System Posts: 178,104 Community Admin
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    Bowl - no worries ☺
    I ought to research more and will over time, but if markets are efficient then everything should be appropriately priced anyway, and i think the odds are in my favour to do better than a more conservative approach, i can sleep at night with uncertainty, at least while it's a small fund
    A lot of time will go buy while i learn, time i don't want to squander, i hate wasted opportunity, am hungry for gains and think fear is overplayed, i believe i can weather not having the money and find work quickly. I'm more afraid of motorways and airoplanes

    FTSE/EPRA/NAREIT Developed Europe Capped Index (Net, GBP)

    It's encouraging that the fund i meant isn't so us based and won't correlate
  • System
    System Posts: 178,104 Community Admin
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    I'm not sure how i can get the expected level of knowledge, so far I've been googling things i don't understand and reading monevator and fool. I would learn the top holdings of the indexes, but all of them is a pipe dream
  • coyrls
    coyrls Posts: 2,437 Forumite
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    I'm not sure how i can get the expected level of knowledge, so far I've been googling things i don't understand and reading monevator and fool. I would learn the top holdings of the indexes, but all of them is a pipe dream

    You're not seeing the wood for the trees. Learn about asset allocation.
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