Slaughtering sacred cows

Unit trust investors are continuing to pour money into commercial property. It was the single most popular asset for private investors putting money into funds last year.

But Jim Wood-Smith, head of research at Williams de Broe, the stockbroker, says it may be “time to sacrifice the holy cow of commercial property”.
He adds: “This may not be the precise peak of returns for commercial property but in the name of prudence it is at least time to take the profits.”
But investors in commercial bricks and mortar may be reluctant to say goodbye to an asset that has performed consistently well for many years. Last year alone commercial property produced a total return of 18.1 per cent, against a return of 16.8 per cent from the FTSE All Share Index.
Mr Wood-Smith says that, in a sense, property has become a victim of its own success. At the start of 2006 it was generally expected that returns for the year would be in the single digits. But the eventual out-turn of 18.1 per cent has had the effect of raising future expectations to what Mr Wood-Smith feels are worryingly high levels. He says: “Its popularity has been such that prices are reaching levels where there is a reasonable risk of capital loss this year.”
He also questions the whole idea of putting money into commercial property purely as an exercise in asset allocation, as some advisers recommend. He says: “There is no point in diversification for its own sake, it has to improve performance.”

Comments

[John Blackmore]

"There is no point in diversification for its own sake, it has to improve performance.”

The purpose of diversification is NOT to improve performance but rather to make the journey less bumpy. Anyone diversifying or rebalancing to improve long run performance is deluded.