Momentum builds for shift from property to equities

Laura Slattery finds the attitudes of wealthy Irish investors are changing, with a shift to more diversified equity-based portfolios

Irish wealth is "disproportionately" skewed toward property, according to a recent report by Bank of Ireland, with 71 per cent of our total wealth tied up in the asset last year.

This compares to just 16 per cent invested of our wealth in equities, while 10 per cent is held in cash and 3 per cent is invested in bonds.

But are Ireland's 30,000 millionaires beginning to abandon the bricks and mortar that have made them so rich in the first place?

Bank of Ireland is predicting that Irish investors, led by high net worth individuals, will start to move away from property, with the shift prompted by "more realistic" property prices and an ageing population's growing interest in investment and pension funds.

By 2015, the bank predicts that the breakdown of investment will be 61 per cent in property, 22 per cent in equities, 12 per cent in cash and 5 per cent in bonds. But this will still leave investors exposed to property.

"We've been advocating for some time now that clients diversify their portfolios," says Simon Shirley, director of the accountancy and wealth management firm BDO Simpson Xavier.

According to Shirley, high net worth investors looking for a compound annual return of 8-10 per cent a year should split their portfolio so that 30 per cent of the net value of the investment (after borrowing costs) is in property and 30 per cent should be placed in investment funds made up of equities and bonds.

Another 30 per cent should be held in alternative investments such as hedge funds and private equity, as well as in commodities and the emerging Asian markets, while 10 per cent should be kept safely in cash.

"Property has performed very well, but there is overexposure. We wouldn't be advocating a wholesale exit from property, but perhaps if you are making new investments, you would put them into equity funds," Shirley says. There is some evidence that people are getting out at the top. "Wealthy investors have been quietly diversifying into other areas because they realise that they have had a very good run."

According to Maeve Corr, director of Deloitte Pensions & Investments, not only have many investors built up wealth through property investments, but they also often own businesses that are overly reliant on the performance of the Irish economy.

"In many cases, their business can be related to the construction industry, leaving them heavily exposed to a downturn," she says. "We have seen a number of clients looking to diversify their asset exposure by investing in equities. Equities are by their nature more liquid than property and can give exposure to markets where purchasing property can be difficult."

There are a number of routes that investors can take, Corr adds. They can use a well-diversified international managed fund, which will invest part of the money in assets such as bonds, property and cash, or they can select a pure equity fund that gives them exposure to specific regions, such as the Fidelity Indo-China fund, which is sold through Irish Life.

Plenty of investors want a relatively high degree of exposure to equities but don't have the time to actively trade in shares. Investing in equity funds solves this problem and is also tax efficient. Instead of having to assess the tax liability on each trade, the growth in the fund accumulates free of income tax, capital gains tax and Deposit Interest Retention Tax (Dirt). The fund is then taxed every eight years and on exit.

"We have seen a focus on concentrated stock funds such as the 5 star funds with Eagle Star," says Corr. "Another area where we see a lot of interest is in high-yield equity funds, as investors have the advantage of a pure equity fund plus a dividend stream, which helps protect against the fluctuations in the price of the underlying assets."

Shirley cites funds such as Bloxham Stockbroker's high-yield equity fund, which invests in equities that pay strong and stable dividends - thus ruling out tech stocks and ruling in large financial stocks.

He cautions against overexposure in adventurous funds like Fidelity's Indo-China fund. "That's a high-risk fund that might be worth a punt over the long term. It is quite volatile and fell back last month, so we wouldn't be saying put all of your money in it - maybe about 5 per cent," he says.

Standard Life's UK smaller companies fund, which invests in stocks such as business information provider Datamonitor and betting firm Paddy Power, is another example of a "pure equity" investment. The fund is not concentrated in any particular sector, with the only criteria being that the firms have market capitalisations of less than £1 billion.

The philosophy behind this fund is to invest in tomorrow's large companies today, but investors should remember that the small company versus big company argument tends to be cyclical, according to Shirley. "Small companies have had a very good run and have outperformed the bigger companies and you would wonder if the performance going forward will be same."

BDO Simpson Xavier is currently selling a six-year alternative investments bond, where half of investors' money goes into private equity and the other half is placed in hedge funds. This investment has a 90 per cent capital guarantee - but, in general, private equity investments can be regarded as being "at the higher end of the risk spectrum", notes Corr.

The feeling that they could lose everything often keeps people away from equities, says Michael Kiernan, an intermediary who runs MyAdviser.ie. "This would underpin the popularity of the new guaranteed managed and equity funds, which are open ended and have minimum price guarantees."

The funds sound great because they offer both guarantees and participation in existing funds such as New Ireland's Evergreen Fund, the Liberty Asset Management Flagship Fund or the Eagle Star Dynamic Fund, Kiernan notes.

But equity investors should be taking a long-term view of five to 10 years anyway, he adds. Over those periods, the chance of needing the guarantee is very low, but the charges could be about 50 per cent higher.

Kiernan says he has not noticed a shift away from property, but some investors have taken the view that now is a good time to invest in equities. The underlying performance of property funds is still strong, with a good rent roll supporting the fund values on Irish and UK commercial property. People who are attracted to higher risk equity funds need to understand that markets can move like a rollercoaster, Kiernan says. "They need to have the ability to ride out a dip."

Corr says that Deloitte would see no difficulty in investing in the 100 per cent equity funds, as long as investors have other assets in their portfolio, although for smaller investors, a managed fund where the fund manager can switch between assets will be more suitable.

But although investors are generally careful not to keep all their eggs in equities, the same rule often isn't followed when it comes to property.

"It is highly unlikely to find one individual that is going to have 100 per cent in equities, yet not uncommon to see people with close on 100 per cent of their portfolio in property and mainly Irish property," says Corr. "We would see this as a very high risk strategy."

People can, it seems, have too much of a good thing.