Welcome to Fund Gurus, two Investment Analysts providing daily views on Macro Themes, Markets and Investments
Wednesday, 17 April 2013
Monday, 15 April 2013
Monetary Easing - How will it all end?
The first round of quantitative easing was implemented by Japan back in the early 2000s as they embarked on ending years of deflation. With interest rates at near zero they aimed to provide excess liquidity to banks in order to promote private lending and spur consumers to spend rather than save. The bulk of the operation was involved in purchasing government debt in order to increase its targeted current account balance. This policy was lifted 5 years later and there was little evidence to suggest much of an effect. The excess liquidity had provided little impact as both borrowing rates and JGB yields were close to zero making the net effect minimal.
A few years passed before QE reared its head again, and this time in a much greater scale. The financial crisis in 2008 saw central banks around the world embark on trying to rescue the global economy from recession. The United States, Europe and UK commenced QE after interest rates were dropped to near zero. Both the UK and US used a similar method of QE, buying government debt and mortgage backed securities to stimulate growth. Europe used a slightly different approach, whereby they used a repurchase agreement via their Long Term Refinancing Operations (LTRO). The ECB bought government debt mainly off banking institutions with the intention for these to be repurchased at a later date. This enabled banks to have more liquid cash on their balance sheets to help during the financial crisis. Being relatively successful, the first round of LTRO repayments have been made and more which is an encouraging sign banks have stabilized and resurrected their toxic balance sheets.
The UK has done £375bn worth of QE since 2008 and with the economy still in a fragile state this could be increased. The US has done over $2.3tn worth so far and as they continue with monthly purchases of $85bn the total figure will be approaching almost $4tn globally towards the end of this year.
Japan’s new Prime Minister, Shinzo Abe, has vowed to get their economy back on track once more and combined with the new governor Haruhiko Kuroda they have established an extremely aggressive monetary easing policy which has flooded the economy once more with liquidity. However this time it is different, previously it has been focused just on monetary easing through quantitative easing. Now Abe is combining fiscal and monetary policy to achieve targets. His three arrow strategy is as follows:
- Monetary Easing - They have committed to $75bn worth of QE per month in order to achieve inflation target of 2% and GDP growth of 2%.
- Deficit financed budget filled with public sector and infrastructure spending
- Structural reforms to achieve growth through sthe timulating private sector.
So does QE work?
Well central bankers would argue yes, it's achieved a lower borrowing rate, provided liquidity to banking institutions and supported businesses through this. However, whilst it may have stopped the economy from being in a worse situation five years ago, the long term effects may be very detrimental.
What has happened?
Aggressive monetary easing has acted as a ballast to most asset classes. As they are mainly purchasing government debt, it has driven prices to record highs, and yields to the floor. Equity markets are another one that has benefited from this support as borrowing costs are maintained at a low level providing easing debt financing. Gold is another one that has benefited as an inflation hedge, many would argue QE leads to inflation over the long term (see below).
So what happens next?
Many would argue, pumping all this money into the system will lead to inflation as the money supply has increased. More money in the system means the value of the currency goes down and prices rise. However, this is not the case, since 2008 we saw a slight rise in global inflation however it has now returned to fairly subdued levels with little sign of moving. The reason why this money may not lead to inflation is down to the implementation of QE. Governments have been purchasing debt which is predominately owned by banks, pension funds and insurance companies for purposes of liability matching. As such these are all end game holders, whereby they would hold the debt to maturity. When the government buys the bonds off these investors, the cash will be maintained and used to purchase another type of liability matching security, namely bonds. The end result is the velocity of money remains very low and does not filter down through the economy being spent by various parties. What has actually been happening is the vast monetary easing has slowly been depreciating the developed nation currencies and like Japan recently been exporting low prices around the world, bringing with it deflationary pressures.
In past experiences, deflation has been present during times of QE, Japan has experienced this for over a decade and has not provided enough of a push to shift this trend.
As the US economy picks up, I am concerned with the detrimental impact to all asset classes when QE stops. A number of FED committee members have expressed their hawkish (higher interest rates) views, and this is a cause for concern. They do not want to continue with $85bn a month any longer than is necessary and this could essentially pull the rug from underneath everyone’s foot sending bonds especially spiralling from record high's.
A few words of caution here, but it is evident things are coming to a head, and I expect the end of this year will present some interesting opportunities for global markets.
The implications of Gold's sharp sell off
The dramatic fall in gold price has continued on Monday, with the price passing below $1,400 and heading as low as $1,390. Many investors, particularly retail investors, are often slow to react and it could be that Friday and Monday morning's sell off were just the start and we see further selling this week.
Short selling of gold, which has passed through various support lines, is also likely to increase and just adds further fuel to the flames, which are currently sending gold into meltdown! So what does all this mean for the wider world? Well obviously holders of gold bullion are going to be hit hard, with prices down over 10% from Friday. Gold mining stocks are also likely to be hit very hard, as many are a leveraged play on the gold price, and we have witnessed this today with many gold stocks down double digits already. The logic for gold miners falling in value is fairly basic; the price of the good they are selling falls, and assuming costs stay the same their margins are therefore eroded and so profits are likely to fall, all in all making the stock less attractive on various valuation techniques.
The question is just how low can gold go? Has it been oversold and is now a buying opportunity? Well this is probably the hardest question in investing. Equities and bonds can often be quantifiable, with companies have earnings (or predicted earnings) and cost structures that allow investors to generally determine fair value. Gold however, has no real economic value and so determining what price is fair value is very hard, and this is why, I suspect, gold will continue to fall further as sentiment is particularly important with the precious metal.
Factors driving the price back up are also harder to work out. Recent events such as Japanese Quantitative Easing, or North Korea tensions have historically been supportive of gold, but not of late, which does raise the question has gold lost its shine?
Short selling of gold, which has passed through various support lines, is also likely to increase and just adds further fuel to the flames, which are currently sending gold into meltdown! So what does all this mean for the wider world? Well obviously holders of gold bullion are going to be hit hard, with prices down over 10% from Friday. Gold mining stocks are also likely to be hit very hard, as many are a leveraged play on the gold price, and we have witnessed this today with many gold stocks down double digits already. The logic for gold miners falling in value is fairly basic; the price of the good they are selling falls, and assuming costs stay the same their margins are therefore eroded and so profits are likely to fall, all in all making the stock less attractive on various valuation techniques.
The question is just how low can gold go? Has it been oversold and is now a buying opportunity? Well this is probably the hardest question in investing. Equities and bonds can often be quantifiable, with companies have earnings (or predicted earnings) and cost structures that allow investors to generally determine fair value. Gold however, has no real economic value and so determining what price is fair value is very hard, and this is why, I suspect, gold will continue to fall further as sentiment is particularly important with the precious metal.
Factors driving the price back up are also harder to work out. Recent events such as Japanese Quantitative Easing, or North Korea tensions have historically been supportive of gold, but not of late, which does raise the question has gold lost its shine?
Sunday, 14 April 2013
Absolute Return funds - a useful Portfolio Diversifier
Absolute Return funds are a relatively new concept and we are seeing more funds of this type launched into the investment market, particularly since the Credit Crunch.
Many investors are sceptical about these type of funds, and much of this sceptism is justified, with some funds just not performing as expected. However, if you do your research correctly, there are some good funds available and they should allow you to hopefully achieve positive terms over a year, independent of economic conditions.
The reason I like these funds is that they can help diversify returns within a portfolio, as they are often uncorrelated with other assets classes. Also consistent absolute positive returns can underpin a portfolio nicely and provide downside protection in falling markets.
Many of these type of funds don't target large returns, maybe only 5% above cash and it is important to have expectations of returns to help avoid disappointment. Some will also exhibit more volatility than others, so make sure you pick a fund to suit your style.
Whilst not for everybody I would definitely consider a portion of my portfolio to be allocated to absolute return funds. Insight have good products; Insight UK Market Neutral fund is a very consistent fund and should return around 4% per annum with at current interest rates. Standard Life have their juggernaught fund, GARS, which is £25bn in size! It is a little more volatile but again has exhibited very strong past performance and has a credible strategy and process.
Many investors are sceptical about these type of funds, and much of this sceptism is justified, with some funds just not performing as expected. However, if you do your research correctly, there are some good funds available and they should allow you to hopefully achieve positive terms over a year, independent of economic conditions.
The reason I like these funds is that they can help diversify returns within a portfolio, as they are often uncorrelated with other assets classes. Also consistent absolute positive returns can underpin a portfolio nicely and provide downside protection in falling markets.
Many of these type of funds don't target large returns, maybe only 5% above cash and it is important to have expectations of returns to help avoid disappointment. Some will also exhibit more volatility than others, so make sure you pick a fund to suit your style.
Whilst not for everybody I would definitely consider a portion of my portfolio to be allocated to absolute return funds. Insight have good products; Insight UK Market Neutral fund is a very consistent fund and should return around 4% per annum with at current interest rates. Standard Life have their juggernaught fund, GARS, which is £25bn in size! It is a little more volatile but again has exhibited very strong past performance and has a credible strategy and process.
Friday, 12 April 2013
Gold Price Tumbles!
Gold, along with many other commodities have been hit very hard today. As I'm writing this gold has broken through the $1,500oz to stand at $1,498oz, which equates to over 4% loss for the day - a huge downward movement.
There's been a couple of big announcements this week that have contributed to this fall. Today, Goldman Sachs downgraded their long term price view, and we all know the weight with which Goldman can influence markets!
Cyprus has also announced plans to sell gold bullion in order to help them meet their debt burden. This means there is a lot of supply hitting the market, lowering price. Quite why Cyprus announced their intentions to sell before actually selling is a strange one to me, rather than sell and then let the market know! Maybe they have short positions on gold!!
By breaking through resistance lines such as $1,500 it could encourage further selling and the price continue to fall.
Long term holders will of course still be up in their investment in gold, but over the past 2 or so years the gold price has fallen significantly and maybe losing its shine with investors!
With the selling that is currently occuring in the market place it will be interesting to see who the buyers are? Many Central Banks have large gold reserves already and may be deterred from adding to this. Jewellery demand, particularly from China and India can be seasonal so this may not produce the immediate demand required to help stabilize the price.
There's been a couple of big announcements this week that have contributed to this fall. Today, Goldman Sachs downgraded their long term price view, and we all know the weight with which Goldman can influence markets!
By breaking through resistance lines such as $1,500 it could encourage further selling and the price continue to fall.
Long term holders will of course still be up in their investment in gold, but over the past 2 or so years the gold price has fallen significantly and maybe losing its shine with investors!
With the selling that is currently occuring in the market place it will be interesting to see who the buyers are? Many Central Banks have large gold reserves already and may be deterred from adding to this. Jewellery demand, particularly from China and India can be seasonal so this may not produce the immediate demand required to help stabilize the price.
Thursday, 11 April 2013
Mining, Natural Resources and what lies ahead
The mining sector has provided excellent returns to investors over the years, however since the credit crisis it hasn't quite been the same.
Mining and natural resource based companies thrive during times of global economic growth and this was inherent between 2005-2007. Economic growth spurred by a huge amount of infrastructure and housing spending especially from China saw demand rocket for resources such as copper, tin and steel. But as the credit crisis hit, these companies were amongst the biggest fallers. Since then global growth has been anaemic which does not bode well for the natural resource investor.
Inventories of metals have reached 10 month highs recently as a lack of demand in China does not inspire confidence. Furthermore, hard commodities react heavily to geopolitical risks and recent news out of the Eurozone and issues with North Korea does not support future demand.
The main driver it seems for hard commodities these days is China. A double digit growth rate in the past has meant the vast country has made up a significant proportion of global demand. Worries over a hard landing were short lived, however investors came to terms with the end of double digit growth. China now begins to focus on quality growth driven by structural reforms rather than mass export growth. For the miners, this does not instil any confidence and as such we have seen a fall in prices and outlook for many of the top miners.
We previously discussed the merits of gold equities, however whilst driven by different demand concerns, these miners continue to be out of favour and some major names have seen their prices almost half since the start of 2013.
Many companies are looking fairly cheap and it begs the question is it time to buy? Those contrarian investors may be licking their lips.
Natural resources covers a fairly varied sector and can encompass the commodities themselves (mainly metals) and the associated companies which offer more of a leveraged play. There are a number of funds are out there in this space one of which is JP Morgan's Natural Resources, whilst returns have been poor the last few years, it provides exposure to a number of large mining companies globally and positioned well to capture the upside from this sector.
This is one sector I would be wary of, the global out looks to remain pessimistic for growth and this will continue to put downward pressure on commodities as inventories continue to rise. You may see a lot more pain here before you are rewarded for your bravery.
Mining and natural resource based companies thrive during times of global economic growth and this was inherent between 2005-2007. Economic growth spurred by a huge amount of infrastructure and housing spending especially from China saw demand rocket for resources such as copper, tin and steel. But as the credit crisis hit, these companies were amongst the biggest fallers. Since then global growth has been anaemic which does not bode well for the natural resource investor.
Inventories of metals have reached 10 month highs recently as a lack of demand in China does not inspire confidence. Furthermore, hard commodities react heavily to geopolitical risks and recent news out of the Eurozone and issues with North Korea does not support future demand.
The main driver it seems for hard commodities these days is China. A double digit growth rate in the past has meant the vast country has made up a significant proportion of global demand. Worries over a hard landing were short lived, however investors came to terms with the end of double digit growth. China now begins to focus on quality growth driven by structural reforms rather than mass export growth. For the miners, this does not instil any confidence and as such we have seen a fall in prices and outlook for many of the top miners.
We previously discussed the merits of gold equities, however whilst driven by different demand concerns, these miners continue to be out of favour and some major names have seen their prices almost half since the start of 2013.
Many companies are looking fairly cheap and it begs the question is it time to buy? Those contrarian investors may be licking their lips.
Natural resources covers a fairly varied sector and can encompass the commodities themselves (mainly metals) and the associated companies which offer more of a leveraged play. There are a number of funds are out there in this space one of which is JP Morgan's Natural Resources, whilst returns have been poor the last few years, it provides exposure to a number of large mining companies globally and positioned well to capture the upside from this sector.
This is one sector I would be wary of, the global out looks to remain pessimistic for growth and this will continue to put downward pressure on commodities as inventories continue to rise. You may see a lot more pain here before you are rewarded for your bravery.
Japan - Exporting Deflation?
It's been well publicised how the aggressive 'loose' monetary policy adopted by central banks is likely to be inflationary. The logic of this seems sound; they are printing trillions of dollars of money, and an increase in money supply should lead to inflation over the longer term.
Japan has recently undertaken extensive quantitative easing and has also directly attempted to depreciate their currency. One would presume this will cause inflation pressures; as mentioned above they have more money supply and also imports will become more expensive, thus importing inflation.
However, there is another take on this which I think is worth some consideration, and something I have not read too much about to date. Firstly we need to consider the Japanese economy. It is an export driven economy. Then we need to consider what a weaker Yen means for these exports. Well in essence it makes exports cheaper to foreigners who are importing them and this is the key to the deflationary pressures that Japan's latest policy could cause. So around the globe countries will be importing goods and services from Japan which are now cheaper, allowing businesses to lower prices and still maintain margins which could lead to deflation.
So what are the possible implications of this? Well the world has generally come to a consensus view that inflation could spike at some point due to the monetary stimulus mentioned above. However, if in fact Japan and other nations with weakening currencies are exporting deflation this may not be apparent, or at least to the extent markets are pricing in.
If you believe inflation may be 'overpriced' then one option is to 'short' inflation linked bonds whose returns are directly linked to inflation. Their price will fall if they have priced in too high inflation.
So for now lets hopefully look forward to some cheaper goods from Japan and be aware that high inflation is not yet a foregone conclusion!
Japan has recently undertaken extensive quantitative easing and has also directly attempted to depreciate their currency. One would presume this will cause inflation pressures; as mentioned above they have more money supply and also imports will become more expensive, thus importing inflation.
However, there is another take on this which I think is worth some consideration, and something I have not read too much about to date. Firstly we need to consider the Japanese economy. It is an export driven economy. Then we need to consider what a weaker Yen means for these exports. Well in essence it makes exports cheaper to foreigners who are importing them and this is the key to the deflationary pressures that Japan's latest policy could cause. So around the globe countries will be importing goods and services from Japan which are now cheaper, allowing businesses to lower prices and still maintain margins which could lead to deflation.
So what are the possible implications of this? Well the world has generally come to a consensus view that inflation could spike at some point due to the monetary stimulus mentioned above. However, if in fact Japan and other nations with weakening currencies are exporting deflation this may not be apparent, or at least to the extent markets are pricing in.
If you believe inflation may be 'overpriced' then one option is to 'short' inflation linked bonds whose returns are directly linked to inflation. Their price will fall if they have priced in too high inflation.
So for now lets hopefully look forward to some cheaper goods from Japan and be aware that high inflation is not yet a foregone conclusion!
Wednesday, 10 April 2013
Bad News Fails to Spook Investors
Equity markets edged higher today continuing a three day rally following on from a turbulent week. There has been a substantial change in market behaviour since the start of 2013 as fear and volatility are becoming much more digestable.
Equities have been the asset class of choice this year, as investors sought to take advantage of improving economic conditions mainly from the US. After reaching record highs and rising almost 10% in the first three months, many investors have become cautious as this rise in equties has occurred very quickly given the level of corporate earnings and economic outlook.
We can expect equity markets to calm down somewhat as Q1 results begin to flow through, however what gives me cause for concern is the way news, especially bad news has been interpretted by markets. This year has already thrown a few curve balls at us. Starting with Italy, their elections ended undecided leaving questions being asked about whether a governement can be formed to continue along the path agreed with the ECB and maintain their involvement with the Eurozone. Whilst volatility spiked during this period, markets were remarkably unaffected. There was an initial sell off on the Tuesday the results were annouced, however by the end of the week markets had closed higher. Secondly, more Eurozone worries flowed through, this time from Cyprus as peripheral countries and their people were reminded how vulnerable they were as bank depositers faced haircuts. This spooked the market again, having a slightly more significant effect than Italy, however yet again, over the following weeks, markets rallied back being pushed along by optimistic data out of the US.
More recent news surrounding North Korea, has been fairly localised. South Korea has seen its markets and currency fall as a result, however global markets have been fairly reserved.
So why is bad news being taken so lightly? This could be down to a number of reasons however it is evident that the psycological impact of bad news has been numbed over the past 5 years. Since the credit crisis in 2008, we have seen consistent flow of bad news from Europe, then the Arab Spring, China's possible hard landing, US fiscal issues, the list goes on. Investors have become used to this and as a result markets can recover fairly quickly from the intial shock. If the issues with Cyprus occured back in 2011, markets would have almost certainly reacted extremely to this.
Another possible cause for markets to be bought back so quickly is the rotation into equity markets. Many investors would have had a large exposure to fixed interest over the past 3 years, and now as bond yields reach record lows, there has been a rotation into equity markets (Great Rotation and the Hunt for Yield). This has certainly occured with the large amount of money sitting on the sidelines in cash. As a result many investors see market pull backs as an opportunity to increase thier positions. There is still a significant amount of money still on the fence, and this could continue to act as a support to markets throughout 2013.
A word of caution, when investors become complacent bad things tend to happen, so be wary of asset bubbles.
In the meantime enjoy the ride, and if you are one of those investors still on the side line, climb aboard there is still plenty of opportunities out there.
Equities have been the asset class of choice this year, as investors sought to take advantage of improving economic conditions mainly from the US. After reaching record highs and rising almost 10% in the first three months, many investors have become cautious as this rise in equties has occurred very quickly given the level of corporate earnings and economic outlook.
We can expect equity markets to calm down somewhat as Q1 results begin to flow through, however what gives me cause for concern is the way news, especially bad news has been interpretted by markets. This year has already thrown a few curve balls at us. Starting with Italy, their elections ended undecided leaving questions being asked about whether a governement can be formed to continue along the path agreed with the ECB and maintain their involvement with the Eurozone. Whilst volatility spiked during this period, markets were remarkably unaffected. There was an initial sell off on the Tuesday the results were annouced, however by the end of the week markets had closed higher. Secondly, more Eurozone worries flowed through, this time from Cyprus as peripheral countries and their people were reminded how vulnerable they were as bank depositers faced haircuts. This spooked the market again, having a slightly more significant effect than Italy, however yet again, over the following weeks, markets rallied back being pushed along by optimistic data out of the US.
More recent news surrounding North Korea, has been fairly localised. South Korea has seen its markets and currency fall as a result, however global markets have been fairly reserved.
So why is bad news being taken so lightly? This could be down to a number of reasons however it is evident that the psycological impact of bad news has been numbed over the past 5 years. Since the credit crisis in 2008, we have seen consistent flow of bad news from Europe, then the Arab Spring, China's possible hard landing, US fiscal issues, the list goes on. Investors have become used to this and as a result markets can recover fairly quickly from the intial shock. If the issues with Cyprus occured back in 2011, markets would have almost certainly reacted extremely to this.
Another possible cause for markets to be bought back so quickly is the rotation into equity markets. Many investors would have had a large exposure to fixed interest over the past 3 years, and now as bond yields reach record lows, there has been a rotation into equity markets (Great Rotation and the Hunt for Yield). This has certainly occured with the large amount of money sitting on the sidelines in cash. As a result many investors see market pull backs as an opportunity to increase thier positions. There is still a significant amount of money still on the fence, and this could continue to act as a support to markets throughout 2013.
A word of caution, when investors become complacent bad things tend to happen, so be wary of asset bubbles.
In the meantime enjoy the ride, and if you are one of those investors still on the side line, climb aboard there is still plenty of opportunities out there.
Tuesday, 9 April 2013
Are UK Households the key to the Recovery?
As a nation the UK has a long history as a dynamic, skilled country and has historically had strong manufacturing and exports attracting business investment.
However, over the recent years the UK seems to have lost its edge. Our manufacturing sector has stalled and we are now a nation of 'importers' rather than 'exporters'. Business investment, particularly foreign investment has also slowed. These trends have escalated since the credit crunch and it is a troublesome path to be on. So in order for the recovery to really take hold we are going to need to see UK Households driving this, and picking up the slack left by flagging manufacturing and export sectors.
So the big question is 'are UK Households in a position to increase consumption?' Well since the credit crunch we have constantly read how consumers have been squeezed and disposable incomes have fallen - a bad sign if we want consumers to go out and spend spend spend! However, mortgage payments for many households have fallen, freeing up capital to spend. Previously consumers had taken on debt (credit cards, loans) in order to purchase goods and services. What we have seen over the past 5 years is households beginning to de-leverage, paying off their debts and increasing their saving rates. This is a good sign on two fronts; firstly consumers have less debt and so could likely increase their debt levels in order to make purchases. Secondly if households have large savings, they may consider spending this now as they will be earning very low interest by having it in the bank.
So there are mixed signs that the UK Households could increase spending in the economy. What I think we need to see is house prices increasing. This makes home owners feel more wealthy and will encourage them to spend in the economy, this has occurred over the past year in the US. Until this time households will continue to be cautious of their spending, and as such the UK economy will continue to exhibit low growth.
However, over the recent years the UK seems to have lost its edge. Our manufacturing sector has stalled and we are now a nation of 'importers' rather than 'exporters'. Business investment, particularly foreign investment has also slowed. These trends have escalated since the credit crunch and it is a troublesome path to be on. So in order for the recovery to really take hold we are going to need to see UK Households driving this, and picking up the slack left by flagging manufacturing and export sectors.
So the big question is 'are UK Households in a position to increase consumption?' Well since the credit crunch we have constantly read how consumers have been squeezed and disposable incomes have fallen - a bad sign if we want consumers to go out and spend spend spend! However, mortgage payments for many households have fallen, freeing up capital to spend. Previously consumers had taken on debt (credit cards, loans) in order to purchase goods and services. What we have seen over the past 5 years is households beginning to de-leverage, paying off their debts and increasing their saving rates. This is a good sign on two fronts; firstly consumers have less debt and so could likely increase their debt levels in order to make purchases. Secondly if households have large savings, they may consider spending this now as they will be earning very low interest by having it in the bank.
So there are mixed signs that the UK Households could increase spending in the economy. What I think we need to see is house prices increasing. This makes home owners feel more wealthy and will encourage them to spend in the economy, this has occurred over the past year in the US. Until this time households will continue to be cautious of their spending, and as such the UK economy will continue to exhibit low growth.
Property Funds - A useful portfolio diversifier
An asset class many people favour is property. Be it owning properties personally or buying a property fund, it can provide an excellent return for your money. There are a number of ways to access this market within an investment portfolio.
Lets classify this into three different types:
Bricks and Mortar funds do what they say on the tin, the fund will invest and manage a number of properties directly. These will provide a low volatile fund generating both capital growth through the net asset value of the properties held and rental income.
The next type of investment is a REIT, this is a closed ended property investment trust, where an amount of money is raised and then a fund manager selects a portfolio of property. They are generally run in a very similar way to bricks and mortar funds however, because they are closed-ended, capital is not required to be kept uninvested (for redemptions) therefore these can capture more upside. REITs are however more volatile, as they are listed on the stock market and therefore be subject to supply and demand. Generally they will maintain a close price (discount) to its net asset vale. Read more on REITs and Investment Trusts.
The final type is a property security fund, these are invested in securities, namely REITs and equities associated with property and these are generally the most profitable and volatile during property bull markets.
The first option will provide you with sturdy incremental gains where as the later two will be more volatile having the potential for greater upside. Each type of investment have their uses, and one would need to clarify why property is going to be added to the portfolio. If you see immediate upside from the property market, REITs and property security funds will be best, however if this is merely to act as a source of steady income and long term capital growth I would suggest the first option.
Some interesting examples of each type of property fund are Ignis UK Property; a top quartile performing bricks and mortar fund with a focus on London and the South East commerical property. First State Global Property Securities would be my first choice for a more volatile fund, it invests in a global selection of REITs and companies associated with property. Finally REITs offer a more sector specific approach to property investment, an example of which would be Primary Health Properties plc, whereby it invests in healthcare focused properties such as GP practices. Or British Land plc for a more diversified portfolio of properties.
Having looked at our poll about where you would have your money invested, almost 40% said property. This is unsurpising, especially for our US readers as the property market there is much more buoyant. Also areas in Asia have seen capital values rise signifcantly espcially in urban areas. There is certainly a lot of positives within the global property market, however for the UK I am affraid it will stay somewhat subdued for the immediate term.
Pick your markets wisely and your funds even more so!
Lets classify this into three different types:- Bricks and Mortar Funds
- Real Estate Investment Trusts (REITs)
- Property Security Funds
Property is generally uncorrelated to most other asset classes however this can be dependant on which type of investment vehicle you choose.
Bricks and Mortar funds do what they say on the tin, the fund will invest and manage a number of properties directly. These will provide a low volatile fund generating both capital growth through the net asset value of the properties held and rental income.
The next type of investment is a REIT, this is a closed ended property investment trust, where an amount of money is raised and then a fund manager selects a portfolio of property. They are generally run in a very similar way to bricks and mortar funds however, because they are closed-ended, capital is not required to be kept uninvested (for redemptions) therefore these can capture more upside. REITs are however more volatile, as they are listed on the stock market and therefore be subject to supply and demand. Generally they will maintain a close price (discount) to its net asset vale. Read more on REITs and Investment Trusts.
The final type is a property security fund, these are invested in securities, namely REITs and equities associated with property and these are generally the most profitable and volatile during property bull markets.
The first option will provide you with sturdy incremental gains where as the later two will be more volatile having the potential for greater upside. Each type of investment have their uses, and one would need to clarify why property is going to be added to the portfolio. If you see immediate upside from the property market, REITs and property security funds will be best, however if this is merely to act as a source of steady income and long term capital growth I would suggest the first option.
Some interesting examples of each type of property fund are Ignis UK Property; a top quartile performing bricks and mortar fund with a focus on London and the South East commerical property. First State Global Property Securities would be my first choice for a more volatile fund, it invests in a global selection of REITs and companies associated with property. Finally REITs offer a more sector specific approach to property investment, an example of which would be Primary Health Properties plc, whereby it invests in healthcare focused properties such as GP practices. Or British Land plc for a more diversified portfolio of properties.
Having looked at our poll about where you would have your money invested, almost 40% said property. This is unsurpising, especially for our US readers as the property market there is much more buoyant. Also areas in Asia have seen capital values rise signifcantly espcially in urban areas. There is certainly a lot of positives within the global property market, however for the UK I am affraid it will stay somewhat subdued for the immediate term.
Pick your markets wisely and your funds even more so!
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