Due Diligence: 2014

Please note: The following information is designed for a UK audience only

Solid Property?: Recent data, in the UK, has indicated property price rises slowing or at their slowest rate for a year. The conundrum being that they were rising fast during the general economic slowdown a few years ago – but the reverse appears to be the case during an uptick in the economy.

The UK property market has been a law unto itself in previous years. From the relative low prices of, say thirty plus years ago, to the relative unaffordability of more recent years the trend has been clear – rising demand (as the family unit changed from parents with multiple children – with possible other relatives living with them – to more one or two person occupancy requirements) coupled with a lagging supply, to say the least, trying to catch up with the trend in demand.. This supply issue was exacerbated during the recessions and more recent great recession such that there are real affordability and supply issues in major hotspots (cities, the South East, London, etc).

Another factor was the supply of cheap credit, during the last fifteen years, as well as the current ultra-low interest rate environment of the past five years. All this has stoked demand while supply remains lagging.

So, is the current cooling in prices a blip or the start of an easing in demand/ increase in supply feeding through to the retail market? Of course, it is likely to be too early to call, but if there was one thing that the recent recession made clear: don’t assume absolute certainty one way or another. The previous trends of relatively predictable rises and falls in value are no longer, necessarily, the concrete foundations that they once were!                                     [6 January 2015]

• Locking-in returns: With the General Election approaching, in the UK, in 2015 there is a temptation to look to ‘lock-in’ investments – and returns – prior to any major changes of economic or political direction in the second half of 2015. On the contrary, to “lock-in” now – while tempting – might risk missing out on opportunities that might arise following the election. Certainly, incumbent parties usually look to offer ‘giveaways’, prior to elections, in order to attempt to encourage the voting population to be more sympathetic (putting it no more strongly that that!). However, the uncertainty of an election – with potentially more variables in policy making now that the ‘standard’ two-party system appears to be broken – may lead to more reasons to wait and see what develops. Generally, post-election, the economic climate can become less optimistic – as the new Government has less reason to encourage support (having won victory) and starts to enact, early on, any changes or uncomfortable policies that it is required to – but in the longer term domestic uncertainty should be reduced, knowing the general direction of policy making until the cycle returns for the next election..

  In summary, the trade-off is between short-term giveaways versus longer term reduced uncertainty and, while it may be expedient, appropriate or suitable to examine the former, an eye should be kept on opportunities from the latter.                                  [30 November 2014]

• Opening up an investment: What is contained within a ‘packaged’ investment? From more straightforward Unit Trusts to the more esoteric and opaque Structured Products and exotic collective investment schemes (often coming from designs in the corporate banking world to be repackaged for the retail market) that have proliferated in recent times, it can be harder to really understand fully what is being offered and what happens to an investment once made in these schemes. Unit Trusts (a collective pool of various clients’ money in a Trust scheme) have been marketable for years and are usually regulated. This is not to indicate that they cannot suffer from bad investments or unworkable investment policies, but – in the main – tend to be viewed as a ‘safer’ option for the more risk-averse.

  In contrast, at the other end of the spectrum, are the more exotic and complex packaged investments. While some can and do provide higher returns (invariably for higher risk) there is the risk from the structure (or nature) of the product itself that it may be caught up by its own complexity and – especially if there are more and more of the same type – interlinked with the risks of the market and the peer group to such a degree that they could represent a ‘structural’ risk. An example of this is the “zero dividend investment trust” (zeroes) popular in the early years of the twenty-first Century. One of the flaws was that the investment trust was able to invest, excessively, in its peer group (ie. other zeroes).. Therefore, when the returns began to fall this triggered a downward spiral of values and prices – as zeroes were linked to the success (or, in this case failure) of their co-investments. Such an interlinked effect bears a remarkable reflection to the ‘domino’ structure that occurred in 2007/8 when the mortgage market (repackaged) and property market led to a twin spiral of downward prices and ultimately to the great downturn we recently witnessed.

  So what stops this from occurring with, say, the standard unit trust market? In a sense, when all prices and values are falling then no unit trusts would be fully immune. However, by limiting investments within strict (and regulated) guidelines on how much can be invested in different sectors, this can reduce the risk within the Unit Trust itself. A non-regulated and opaque structure can lead to investments being wittingly or unwittingly linked (or correlated) to an excessive degree.  The old adage of “don’t put all your eggs in one basket” applies!          [6 October 2014]