Average IMA Property portfolio returns 21% over 12 months, with First State Global Property the top performer
There has been a marked improvement in property fund performance since retail investors started returning to the property market towards the end of 2009.
The average fund in the IMA Property sector has returned 21% over 12 months to 14 June, according to Morningstar.
This is a significant improvement compared to the three-year view, which shows an average decline of 32.9%.
Global property funds have significantly outperformed UK property funds over the last year, filling all top ten positions in the IMA peer group with gains of at least 29%.
First State has two funds in the sector – Asian Property Securities and Global Property Securities – both run by Andrew Nicholas.
Global Property Securities is the top performer in the sector over 12 months, up 52.4%.
Andrew Nicholas believes outperformance is primarily due to First State’s bottom-up in-house research process
He says: “We build up the property fundamentals into the portfolio first and foremost.
“Unlike many of our peers, we have our own in-house teams across the regions. This helps us build a very collegiate approach to the way in which we develop our portfolio construction.”
The manager has bought a number of non-benchmark stocks that have contributed strongly, with a high proportion sitting within the portfolio’s top 20 performers.
The fund was heavily exposed to China, but in recent months Nicholas has steadily reduced exposure to Chinese developers.
In Europe, he has concentrated on a number of new issues. He highlights Cashbox as a company with a strong management team, which he believes can add value.
Nicholas says: “There are also a couple of interesting European names which have been a bit unloved but where we saw some strong cashflow generation, good management, and balance sheets that have been repaired.”
In contrast, exposure to Japan has detracted from performance.
Nicholas explains: “We moved more heavily underweight Japan on the basis of the pretty poor fundamentals there, which flowed through to our numbers in terms of expectations of potential growth.
“This has hurt us a bit because the Japanese market has not been as bad as predicted.”
Fidelity’s Global Property fund is ranked second in the sector over one year, up 45.2%.
Manager Steven Buller believes the strong performance is due to his decision sixteen months ago to segregate the global property securities universe into ‘offensive’ versus ‘defensive’ stocks.
There were three primary characteristics within this segregation.
The first was sector. Buller gives the example of a hotel with a large turnover of short-term guests as the riskiest type of property sub-sector. Conversely, defensive sectors would include healthcare and real estate in the US, both of which are characterised by fairly stable demand.
The second characteristic was business model. A defensive business model would include owning the revenue streams from properties and passing them on to the shareholders, primarily in the form of dividends.
An offensive model would be listed property companies involved with development, redevelopment, more transactional trading-type income, and fund management.
The third, and most important characteristic, was the strength of the balance sheet – how much gearing was used, whether there was access to debt and equity capital, and at what cost.
“We saw huge disparity in terms of valuation. On average there was about a 40% disparity between the defensive and offensive stocks,” Buller says.
“We thought this disparity was too large and we very much overweighted the offensive listed property companies around the world.”
He says the strategy worked best in the largest property securities, whether measured by the world property benchmark or in the US Reits market, where the most offensive companies outperformed quite substantially.
“This fund was overweight the US and those stocks,” he says.
Buller says the strategy worked less well outside the US, however.
“We had, for example, French retail landlords that had very low gearing and were very defensive, and who were at times very good performers,” he says.
“Meanwhile, we had offensive ones, such as Chinese residential developers, which actually underperformed for the majority of the period.”
In recent months, Buller has scaled back the fund’s risk profile because he says the disparity on average between offence and defence has contracted to about 10%.
He says: “We are slightly overweight offensive ones, especially outside the US where we believe there is the potential for a much larger disparity than 10%.”
Buller also believes Fidelity’s worldwide structure has contributed to performance because it provided him with access to equity analysts worldwide.
“This meant I was able to find out what was happening in the capital and credit markets, which was extremely helpful,” he says
“I would argue the last 18 months has had less to do with the real estate or property side of how the stocks have performed, and more to do with the capital and credit side of property.”
Schroders’ £523m Global Property Securities fund is ranked seventh in the Property sector over one year, up 34.9%.
Manager Jim Rehlaender says the fund has benefitted from shifts he made in exposure to Asian markets last summer when he became nervous about rapid market growth.
He says: “We reduced our holdings in the residential sector and increased our positions in the retail and office sectors, particularly in Singapore where a lot of investors saw the cranes popping up and worried about excess capacity.
“But the stocks were trading at such cheap levels we thought that was more than adequately compensated.”
Rehlaender also attributes the fund’s performance to good stock selection.
“It has been a really good stockpicking environment, and it is the companies which have had better quality management teams and balance sheets that have driven returns,” he says.
Rehlaender admits his decision not to cash in on the bankruptcy trade, particularly in the US, has detracted from performance.
“You could either potentially make a lot of money or lose a lot, which was not appealing to us, but actually cost us in terms of performance, “he says.
“But this has been a short-term trade and those days are over.”
He notes in both the US and Europe, private investors currently face problems getting access to capital, while public companies have very good access to both debt and equity capital.
“I think over the longer term they are going to win the prize, “he says.
“They will be very competitive with anybody on the private side buying assets off banks’ books or taking out competitors and growing the business, because they do have the lowest cost of capital.”
Rehlaender also believes there are solid economic foundations in Asian markets.
“I think the worries about the China bubble are overblown,” he says.
“The impact of the recent anti-speculation measures have hit the mark, and brought the development activity almost to a halt. Property sales last month were down 40% - 50% from the same period last year.”
Rehlaender adds: “Property companies in Asia are starting to look attractive again, trading at 30% to 40% discounts to NAV with virtually no leverage.
“We are looking to shift more assets in this direction and the US, while limiting our exposure to the European markets, particularly the euro, until we get more clarity.”
