Real estate funds lost value

A Chinese educated investor met me today. She was led to invest in two financial  products by a bank relationship manager on the promise that it was capital guaranteed and had the potential of a good return. After three years, she lost 40% on the investment and found that it was not capital guaranteed. The investor said that she was not aware about the product, as it was in English.

I found out that she had invested in two real estate unit trusts. I was surprised that these two investments lost 40% of the value during the past three years, when the global real estate and stock markets had recovered from the downturn.

I suspect that the investment banks that created the two real estate funds could have put in bad assets at inflated values - which accounted for the large loss. This is an example of the risks of investing in funds that could be created by dishonorable financial institutions who wanted to get rid of their bad assets to unwary investors.

The bank who mis-sold these financial products offered to cover half of the loss "out of goodwill". The investor asked for my views on whether she should accept this offer. I advised her to accept the offer as the decision from FIDREC is likely to be less favorable. She does not have any evidence of the misrepresentation of the product.

Lesson: it is best to avoid funds where the creators of the funds may have some bad assets to offload to investors. These institutions are quite willing to act dishonorably.