Property can play a useful role in a diversified portfolio, but poor timing has not helped our ETF portfolio
Cris Sholto Heaton Investment columnist
Investment strategy
Sometimes in a portfolio review, you need to admit that there were points when you consistently got it wrong. And so it is with our exchange-traded fund (ETF) portfolio. We have two holdings left to consider and both involve mistakes for which I kick myself. We’ll consider the dilemma of our UK mid-cap holding shortly, but first let’s look at the property position.
The 10% allocation to commercial property has been in the portfolio from its earliest days in 2013, through ETFs that mostly invest in real-estate investment trusts (Reits). The argument for having some property is that this is a real asset (see below) with different characteristics to bonds or stocks. Reits don’t perform exactly like direct property investments – often they will behave more like stocks – but they are likely to do well in circumstances when most other sectors don’t, and so they add something useful to the portfolio.
Switching too late
Initially, we invested only in UK property, on the basis that the extra volatility from holding overseas property wasn’t helpful. This paid off at first, with our UK property outperforming a global property ETF (see chart), but in retrospect being concentrated in the UK was a risk and it may have been better to diversify from the outset.
In early 2016, I considered swapping it for global property to balance potential risks from the Brexit vote, but the 50% that the global ETF had in the more expensive US market seemed less attractive. But after the vote for Brexit became reality and as the whole process degenerated into a shambles, UK property underperformed.
We shifted into global property in June 2020 as markets sold off due to the pandemic and that has beaten UK property since then, with a total return of about 10% for the global fund, versus a loss of about 15% for the UK fund. Still, there is no doubt that I should have suggested this earlier.
Hurt by higher rates
What’s more, while that switch was finally the right call, even global property has been a weak performer since then. This is mostly due to higher interest rates: working from home and online shopping have affected offices and retail, but these ETFs also hold Reits in sectors such as logistics that have been beneficiaries. You can clearly see that the decline in both the global and UK ETFs begins as the p
