Is Opportunistic Investing Rewarding? – A Study of United Kingdom Unlisted Funds

Abstract

This study primarily investigates the impact of extreme financial leverage on UK unlisted property fund performance over a 11 year period, 2004 to 2014; accordingly the research problem is addressed applying a panel auto regression to an extended sample provided by the IPD Property Fund Vision Handbook covering funds information over a complete property cycle from 2004 to 2014. The results provide strong evidence in support of the traditional theory of capital structure asserting that financial leverage is a significant determinant of firm performance. A significant positive relationship is found between Leverage and performance of core and value added funds over the cycle but interestingly a significant negative association is seen for opportunistic funds as they underperformed through the cycle. Consequently, it is concluded that fund value may be enhanced by debt finance but must be kept at minimal levels, as an optimal debt finance level seems to exist considering the behaviour of Opportunistic funds over the investigated period. Key to the deduction is that irrespective of investment style (gearing intensity) through the cycle, performance persistence seems to sum the success or failure of UK unlisted property funds as lagged return showed a significant positive relationship in all regression results. Therefore the question of whether an unlisted fund persists in performance becomes even more decisive in determining how investors should select funds and develop investment strategies.

Keywords: Performance, Leverage, Value added, Opportunistic, Unlisted funds