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My asset allocation: Lothian moves from bonds into property

My asset allocation: Lothian moves from bonds into property

Verus Wealth has reduced bond allocations in favour of UK property.

It marks the first time the Dundee-based advice firm has sought exposure to physical UK property since 2007, having fortuitously sold out ahead of the credit crisis. Property initially appeared on the investment committee’s radar in the wake of the UK’s vote in favour of leaving the EU last year.

Better than bonds

The decision was taken to buy into the asset class last November. Clients have exposure through the L&G UK Property property authorised investment fund (PAIF), while a small number also hold the Kames Property Income PAIF.

‘At that time, some of these funds were still suspended,’ said Paul Lothian, a director at Verus. ‘As we’re allocating on a long-term basis, we aren’t worried about the fact property managers can suspend trading.’

The investment committee reduced bond allocations in favour of property because they felt the bond asset class no longer looked attractive in the medium term. ‘We were looking at the relatively poor upside for bonds, given the unwinding of quantitative easing and potential for higher interest rates,’ he added.

As bonds are typically used to dampen volatility, the committee looked at other asset classes with the potential to play this role. They decided that property represented the best option.

No kneejerk reactions

Verus focuses on long-term strategic asset allocation, so the investment committee tries to avoid making portfolio changes based on short-term events. The investment committee meets annually on a formal basis and biannually on an informal basis, typically favouring index funds for portfolios. ‘We don’t speculate: we invest,’ Lothian said.

Meanwhile, the team works hard to make sure clients are aware the value of investments can go up and down, so if markets fall they should try to be patient. ‘We aren’t going to panic sell. On that basis, there is very little reason to change your view on bonds versus equities fundamentally. But what we might change are the funds we are using to target that,’ Lothian explained.

Looking ahead, the team is considering substituting a number of Dimensional funds into portfolios, now they are available to buy via their preferred platform. The team likes the fact these funds typically offer greater diversification in comparison to other index funds and have a tilt towards value and small caps.

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