The portfolio is up 16.25% year to date.

The quarterly numbers for this update of our model passive portfolio are skewed because I’m reporting a week later than normal. Still, the portfolio has jumped another couple of grand and not because of the usual suspects.

UK conventional bonds and global property have each put on 8% since the last Slow & Steady post. Their ascent amply made up for the downward lurch of volatile emerging markets and those pesky UK equities that gyrate every time Boris Johnson waggles an eyebrow.

Here’s the latest portfolio numbers in GlobalSlowdown-o-Vision:

We're up 3.86% since the last report.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Global Property is an instructive case study in how hard it can be to tap into certain asset classes purely with index trackers. The property asset class is meant to enjoy low-ish correlations with equities and bonds – with expected long-term returns falling somewhere between the two.

But the available tracker products invest in the equities of Real Estate Investment Trusts (REITs).

REITs do enable us little guys with our limited investment funds to gain exposure to commercial property in a more practical way than trying to negotiate a broom cupboard lease in a Manhattan skyscraper or owning a smoke alarm in a Dubai shopping mall.

The issue though is that while the share prices of REITs are affected by the underlying property market, they’re also highly correlated to equities.

This multi-asset presentation from Vanguard indicates that REITs only partially map onto the flavour of property prices we’re most familiar with:

US REIT correlation with house pricesAnd this Trustnet Chart shows the photo-finish in 10-year returns between iShares Developed Market Property ETF (invests in developed world REIT equities) and iShares MSCI World ETF (invests in developed world equities with just a percent or two in REITs):

Over 10 years and even five, there’s little between developed world REITs and developed world equities.

Equities outperform REITs handsomely over three years but REITs rule over the last 12-months: 23.9% to 7.3%.

The chart tells us that equities and REITs were highly correlated these last 10 years. The World equities purple line is like the ghost car in a video game for the Dev Markets Property ETF on the red line – only the REIT was the one more likely to make you sick.

Passive investing maven Larry Swedroe wrote an interesting piece on the volatility of REITs and whether they really offer any diversification bonus at all. Swedroe’s conclusion – like my personal experience – is that REITs are an edge case:

…REITs are an equity security with only marginal diversification benefits.

More worryingly, the studies that Swedroe analyzes cast doubt on the likelihood of REITs protecting you in a crisis:

[…] equity returns are significantly more connected to the returns of securitized real estate when both markets are crashing compared to when they are booming.

[…] the timing of extreme market movements between REITs and stock indexes is almost perfectly in sync.

Taken together, the results in this and previous studies do not dispute the long-run benefits of REITs, but they do raise questions about the role of REITs in a mixed-asset portfolio in times of financial crisis.

I’ve been wondering whether REITs are worth their place for a while. Their occasional turn against the run of play – as per last quarter – has stayed my hand. But the mounting evidence is making me question the 10% allocation to property that’s common in the lazy portfolios.

I could easily live without the complexity of a dedicated REIT tracker and take whatever exposure I get to commercial property via global stock markets.

As ever, I’m in no rush. Next quarter the portfolio gets rebalanced with an extra 2% of the allocation tipped towards bonds. That’s likely to be the start of this model portfolio’s move out of REITs.

New transactions

Every quarter we sprinkle £955 into the financial flower beds and hope to come up smelling of roses. Our new cash seedlings are split between our seven funds according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule but that hasn’t been activated this quarter. Therefore our trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £47.75

Buy 0.233 units @ £205.08

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £353.35

Buy 0.916 units @ £385.64

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £57.30

Buy 0.19 units @ £302.41

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B84DY642

New purchase: £95.50

Buy 58.09 units @ £1.64

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B5BFJG71

New purchase: £57.30

Buy 23.416 units @ £2.45

Target allocation: 6%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £296.05

Buy 1.597 units @ £185.34

Target allocation: 31%

Global index-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.36%

Fund identifier: GB00BD050F05

New purchase: £47.75

Buy 44.543 units @ £1.07

Target allocation: 5%

New investment = £955

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table for other good platform options. Look at flat-fee brokers if your ISA portfolio is worth substantially more than £25,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

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