Getting the balance right - Isle of Man Today

22 Business updateIsle of Man Examiner, May 2005YOUR PORTFOLIOPETER SHARKEYPeter.Sharkey@btinternet.comSMART INVESTMENTSThe perfect portfolioPerhaps the most annoyingtelevision commercialcurrently invading our livingrooms on a much-too-frequent basis showsa dome-headed individual purporting to bea ‘designer’ in search of perfection. He sitsinside a car with his knowing assistant,whose face displays a mix of incredulity anduncertainty, while extolling the virtues ofthe motor in a slightly laboured, oh darling,all-designers-speak-like-this manner.Perfection in a car? Come on!Nevertheless, the commercial was useful inone respect as it made me considerwhether an investor may go aboutconstructing the perfect portfolio; indeed,can such a design really exist?I suppose before taking this idea further,we should try to define portfolio perfectionwhich, just like perfection in a car, canmean completely different things todifferent folk.According to one independent adviser,Bestinvest, the perfect portfolio can beconstructed from scratch provided you’re acertain kind of investor seeking specificaims. The company has categorisedinvestors into four broad types; three ofthese groups are content to focus oninvestment growth while the other looks togenerate income. Significantly, the firmbelieves that when constructing the perfectgrowth portfolio, be it cautious, balanced oradventurous in nature, investors shouldconcentrate primarily upon equities.Naturally, several factors can determinean investor’s attitude towards investment,especially equities, but as Justin Modray ofBestinvest said: ‘Last year’s interest raterises have made cash appear moreattractive, but if you are investing for fiveyears or more, equities are likely to producebetter growth.’Such an assumption is ably supported bythe statistical evidence: over the pastcentury, equities have produced an averageannual return of 5.1 per cent while cash hasgenerated a real return of just 1 per cent. Inother words, cash may look very attractiveat the moment, but the investor in search ofthe El Dorado that is the perfect portfoliocan afford to avoid sectors boasting strongshort-term performance.It goes without saying that investors needto spread their savings and investmentsamong a variety of asset classes in order tominimise risk. The cautious investor, forexample, should have just over a quarter ofhis savings in UK equities and about thesame invested in fixed interest accounts;only 7 per cent of savings should be held incash. This leaves plenty of scope to invest inincome-producing property as well asoverseas equity markets, particularlyEuropean ones.Understandably, the allocation of assetschanges according to an investor’s attitudetowards risk. This means that theadventurous type hunting for portfoliogrowth will have nearly one third of hissavings invested in the UK equity marketand a further fifth in European shares; overa quarter will be in either Japanese,American or ‘emerging market’ equities.Such dashing investors will generally onlyhave 10 per cent of their portfolio in fixedinterest accounts.Those falling between the cautious andthe adventurous growth investor, ie. themajority, will show less inclination to dipinto too many different asset categories.Nevertheless, for such investors, Bestinvestsuggests that UK equities should providethe cornerstone of the perfect portfolio; onethird of the balanced investor’s savingsshould be in the stock market and almost20 per cent in European markets; a further14 per cent is likely to be in fixed interestaccounts with just 3 per cent held in cash.Of course, Bestinvest has used thebroadest of brushes in its investorcategorisations which means investorsshould remember that, just like a car,investment perfection is a notoriouslydifficult thing to achieve.PROPERTY SPECULATIONMost investors delight infinding an ‘edge’ —being the first into apotentially lucrative sector, therebymaximising their returns. Property inparticular is one investment sector whichregularly dangles the tantalising prospect ofeasy profits, although it is difficult to keep asecret for long.Once the powerful forces of supply anddemand get to work, it can sometimes feelas though everyone and his brother hasmanaged to take advantage of a specificopening, while the cautious are left on thesidelines. This is not necessarily a bad thingas the more circumspect investor can learnfrom mistakes made by ‘early movers’;indeed, on some occasions, it can be averitable blessing to observe from afar.In the past few weeks, at least fourcompanies have been wound up by theHigh Court after offering investorsdesperate to join the buy-to-let bandwagona chance to buy cheap properties in theNorth of England, each seemingly offeringseductive double-digit yields.The sales pitch employed by thesecompanies has been remarkably similar:they offered to build a property portfolio bylocating houses in letting ‘hot spots’ andToo goodto be true?then arranging for them to be refurbished.The supply side of this equation, ie. theavailability of property, was rarely aproblem; the difficulties arose when thecompanies tried to match demand fromtenants with their sparkling real estate.Three of these Manchester-basedcompanies were controlled by anundischarged bankrupt. Investigators foundthat in the space of just 10 months, he hadtaken more than £700,000 fromunsuspecting investors who had,unbelievably, paid more than double themarket value for some of the propertieswhile little, if any, refurbishment had beencompleted.It would be easy to argue that greed haddriven investors to be duped by thesescams, although stupidity is another wordwhich comes to mind. Investors shouldalways take claims about property returnswith a pinch of salt and make every effort togarner information about the company andthe people with whom they are dealing. Ifthings don’t look right, no one is compelledto invest. Walk away!To date, the worst recent property scaminvolved a company called PracticalProperty Portfolio, wound up by a court inLeeds last month after taking a staggering£100 million from investors and sellingthem boarded-up terraced houses and thepromise of 15 per cent returns. Investorswere required to part with £18,000 to use asa deposit and for ‘refurbishment’, afterwhich they were encouraged to remortgage,releasing equity with which the nextproperty could be bought.When I first saw a ‘PPP’ advertisementabout four years ago, I obtained furtherdetails which, on paper, looked impressive,but there was no way I was prepared toshell out £18,000 on something I hadn’tseen. The properties being touted by PPPwere based around Newcastle, so despitethe distance, I decided to go and have alook at what was on offer.After being collected from the station,one of the company’s hard-sell directorstook me to look at the type of propertiesPPP were buying. To say they were in theless salubrious part of town is anunderstatement; furthermore, I was notshown one property that was actuallytenanted. The following day, I visited thecompany’s solicitors in the centre ofNewcastle where a lady seemed quite keenfor me to sign a contract and hand over acheque. This approach to business gave offall the wrong signals and I declined.‘Missed opportunity?’ I wondered on thejourney home. Even at the time I didn’tthink so, but obviously many people wereprepared to invest without taking the mostrudimentary precautions. Finding aninvestment edge is fine, but as the oldadage says, when things look too good tobe true, they usually are — and nowhere isthis truer than in the UK property marketright now.