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Diversification Saves The PIN Fund in Q2 2019

Peter Hemple reviews our fictional fund of property related shares

When we first started this fictional fund five years ago, the intention was to create a fund consisting of housebuilder shares only. As we expanded the number of listed stocks in the fund from 5 to 10, it made sense to diversify into other areas of UK property, and the benefits of doing so were highlighted in the second quarter of this year. The five housebuilders in our fund all underperformed, despite some healthy dividend payments, returning a loss of 5.8% in Q2, compared to almost 3% for the FTSE 100 (including the average dividend payment for the index of 3.9% per year, or 1% per quarter).

However, the other five stocks, consisting of Rightmove, two self-storage firms and two student property providers, returned 3.4% in Q2. This saved the fund’s blushes, and resulted in a total loss of just 1.2% for the second quarter.

The obvious problem with having a specialised fund that just focuses on housebuilders, for example, is the increased risk of negative returns if something bad happens in the sector. This is especially true for housebuilding shares as many believe that their profits are being propped up by the Help to Buy scheme and the sudden extension, or withdrawal, of the scheme can easily swing the housebuilder share prices up 30% or down 50%, respectively.

Leaseholds to be banned for new-build houses
In the second quarter of this year the focus was not on Help to Buy, but instead on leasehold contracts, and on 27 June the Government announced that housing developers are set to be banned from selling new-build houses on a leasehold basis, while ground rents on new leases will be slashed to zero.

The move resulted from an ongoing scandal that has seen developers take advantage of leaseholds to maximise profits, leaving 100,000 families facing crippling ground rents - and difficulty selling. All new-build houses will be sold as freehold, although the ban is not applied retrospectively, which means only future homeowners will benefit. Flats will still be able to be sold leasehold.

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