The real estate sector may have only 4% of the assets of the collective investment schemes industry, but it is still a substantial R81.4bn.
Part of the success of the property sector over the past 15 years can be explained by the increased demand for retailer investors. They made the right call by favouring property over bonds. Even though bonds represent a larger, more liquid pool of funds, there is just R61.7bn in bond funds (now called variable term funds).
All the large fund houses run property funds, with the exception of Foord and Allan Gray. These businesses have taken a conscious decision to keep their ranges tight.
Property has given a number of specialist black economic empowerment property firms the chance to emerge. Sesfikile has a respected unit trust and Meago ran Absa’s property fund but doesn’t have a fund right now (no doubt it will correct this soon).
Even though the property sector is relatively small, genuine excess return, or alpha, has often been scarce. There is too much of a tendency to hug the benchmark. Managers are afraid their returns will look too "different" from the peer group if, for example, they leave out behemoths such as Growthpoint or Redefine.
It is now a lot easier for investors to access a passive index — Sygnia offers a low-cost property tracker fund.
There is even more indecision as property portfolio managers wait for the launch of new indices. Right now the SAPY index excludes UK-based Intu and Capital & Counties. Their original parent company, Liberty International, had a market cap substantially higher than the rest of the JSE property sector. There was logic to excluding it. This no longer applies — Intu now has a smaller market cap than Resilient and Capco is smaller than Fortress B.
Managers are afraid their returns will look too ‘different’ from the peer group if, for example, they leave out behemoths such as Growthpoint or Redefine
Other fully offshore businesses such as Nepi Rockcastle and EPP are in the "domestic" index. The JSE is introducing three new indices, the SA Reit Index, which focuses on SA-domiciled real estate investment trusts, though it will be hard to make this a pure domestic rand income fund, given that domestic shares such as Growthpoint and Redefine have expanded overseas. The other new indices will be the All Property Index which will include all JSE-listed property shares, so no exclusions, as well as the more liquid Tradable Property Index. It has been a long process for the JSE to set up these indices, no doubt because of the endless debate on what is foreign and what is domestic.
Property has done well in the short term. In the third quarter it gained 5.7% compared with 3.7% from bonds and 1.8% from cash.
Property remains an excellent inflation hedge as there is an 8% escalation in almost all commercial leases.
The funds we have selected this month include the two funds which are enjoying a winning streak. Fayyaz Mottiar at Absa and Liliane Barnard at Metope both have the confidence to make the bold decisions to generate alpha. The other funds we have looked at have had a satisfactory performance but will need to do some introspection — are they ready for more competition from index? You might expect Investec Property Equity to be more than a middle-of-the-road fund given its strong roots in the property industry, Growthpoint started life at the big zebra. Investec Asset Management didn’t become such an excellent business by just taking incremental risks.
Stanlib Multimanager arguably has a client base which is looking for the certainty of a benchmark-hugging (or at least benchmark-cognisant) fund. Multimanager funds will rarely be the best in the sector, but even more rarely should they be bottom of the pile.
We also look at Mazi Capital’s property fund. It is not a house associated with property. It has an excellent record as an equity and balanced manager so the chances are it has put good processes in place to run its property fund. Looking at its portfolio, though, it still has too much of the feel of a benchmark hugger. It needs to do more than simply keep the show on the road.
Absa Property Equity Fund
The fund has been a runaway winner in the sector under the stewardship of Fayyaz Mottiar. Only Liliane Barnard at Metope has been giving him any real competition.
Absa has R5.6bn under management in property, with R3.9bn in the unit trust and R1.8bn in segregated mandates. It has achieved an 11% outperformance of the SA property index over the past three years as well as the peer group median.
Mottiar says the key difference in the fund is that it is unconstrained, yet also risk managed to ensure that strong returns are achieved without excessive volatility. Mottiar used to work in Absa’s property private equity unit as well as in fixed-interest funds and index funds. He pays little attention to dividend yields, believing that it is more important to target total returns.
The share that made the largest contribution to the portfolio was Greenbay, which added more than 4% to the relative return. Yet it is a Western European growth stock with a modest 2% yield. And the fund also benefited from a very low position in the large diversified domestic shares. It had less than 1% in Growthpoint (nearly 195 of the index) and less than 2% in Redefine.
The fund’s top holding is Resilient, headed by Des De Beer. It is generally considered the most dynamic of the large diversified listed property groups.
The only other large group in the top 10 is Nepi Rockcastle, which focuses on Eastern Europe. Resilient shareholders get a stake in this thrown in. Absa also owns Hyprop, owner of Hyde Park Corner, Clearwater Mall and Rosebank Mall, though at two-thirds its index weighting.
Most of the overweight positions are in offshore counters such as MAS Holdings and Greenbay. The big domestic bet is logistics specialist Equites, which makes up 9% of the fund though it is less than 2% of the index. It is backed up to a lesser extent by Arrowhead on a triple-index weighting of 6%. It has an unusual portfolio, with a large indirectly held residential component. It also provides a double helping on Vukile, which has evolved from a demerger of Sanlam Properties into a desirable portfolio of neighbourhood shopping centres.
When Mottiar talks about the Swan he doesn’t mean unexpected black swan events. The name stands for “sleep well at night”. The portfolio is an optimised blend of onshore, offshore and cash. Late in 2015 and 2016 the cash holding in the fund approached 25%. It is now at around 14%.
Metope Met Property Fund
Liliane Barnard, who manages this fund, could be called property’s answer to Sygnia’s Magda Wierzycka — glamorous and a little mysterious, yet shrewd.
She has worked as a listed property analyst at Old Mutual Asset Management and also ran the direct property portfolio at Old Mutual Property.
At Metope she has imposed an old-fashioned fundamental research regime, with an emphasis on thorough research of the local property market, the shares themselves and macroeconomic factors. And it shows — her fund is running neck and neck with Absa over the past year, and both are well ahead of the pack.
Yet such is the power of distribution that Absa’s fund remains 100 times bigger than Metope’s, which has a mere R40m. This should improve after the fund reaches its three-year track record in February 2018.
Barnard says the team keeps an eye on what’s in the benchmark, but the main focus is on providing maximum income to clients, remembering that a good property portfolio should also provide capital growth. With an eye on the mix of growth and yield, the fund is 50% invested locally, 50% offshore. She wants to be sure that if the rand strengthens the fund will still have an exceptional performance.
She believes in remaining fully invested and less than 2% of the fund is in cash. Many of her picks were similar to Mottiar’s, including Greenbay, MAS Holdings, Nepi Rockcastle, Equites and Resilient. She had quirky touches, such as SA Corporate, which has had close ties to Old Mutual. A poor performer in the past, SA Corporate might be a rare example of a value share in an overheated property sector.
She does not hold Liberty Two Degrees, owner of Sandton City and Eastgate, as she does not like the structure, which favours the Liberty policyholders and gives Liberty Life the option to buy properties at any time without shareholder approval.
And she has reduced her exposure to large shopping centre king Hyprop.
Stanlib Multimanager Fund
Until recently the idea that a multimanager could add value on such a narrow universe as the JSE property sector would have been controversial.
Where are the differences in style that make the process potentially helpful in equity funds and even fixed-income funds?
But Stanlib Multi-Manager’s Lubabalo Khenyane and Malcolm Holmes have picked a spread of quite distinctive managers — Bridge, for example, was recently introduced as it has a strongly domestic high-yield tilt. In contrast, Stanlib also includes a passive portfolio that tracks an offshore-biased index known as the capped property index. It includes two of the stalwart SA managers — Stanlib, under Keillen Ndlovu, and Catalyst.
The combined result, though, is definitely benchmark-hugging. The four largest shares are the four dominant parts of the index — Growthpoint, Nepi Rockcastle, Redefine and Resilient.
But the fund appeals to a different audience from the cultish followers of the Absa and Metope funds. Holmes says the fund is predominantly used as a building block in different scenarios, such as risk-profiled funds, goals-based investing, life-staging funds and other multimanager frameworks.
Khenyane says the fund is benchmark-cognisant, though of course he delegates security selection to expert managers. He says the underlying managers added value buying and selling Nepi Rockcastle at the right time, while Delta and Dipula rallied at the right time.
Stanlib sees some risks in the current property environment, particularly the oversupply in office space and 10% vacancy rate in many places.
Holmes is a strong supporter of a total return approach and doesn’t encourage clients to look at the running yield in isolation. A single-minded focus on income fails to recognise price, which is one of the most powerful signals in the market. It may be nice to think that investors only “eat” income returns, but it is unrealistic.
Investec Property Equity Fund
This fund was put on the map by its first portfolio manager, Angelique de Rauville. Now under Neil Stuart-Findlay, it has grown to R5.8bn, which shows the strength of Investec marketing, as the fund has been at or around the benchmark since inception in 2004.
It is dominated by the large index shares such as Nepi Rockcastle, Growthpoint, Redefine, Resilient and Fortress. Stuart-Findlay says the fund benefited from an overweight exposure to offshore-focused shares such as Sirius, which concentrates on unglamorous German industrial parks, as well as Pan European MAS Real Estate.
The fund took full advantage of the third quarter’s rally in property shares, with a 5.8% return net of fees. Stuart-Findlay attributes the sector’s strength, even at a time of political uncertainty, to positive global sentiment towards emerging markets. The defensive characteristics of the sector, based on its inflation-hedged income stream, also helped. Investec avoided landmines through a low exposure to Hyprop and no holding in Rebosis. But the holdings in Arrowhead and Texton (where De Rauville once worked) hurt. Stuart-Findlay says there were mispricing opportunities in the market. He increased exposure to Vukile, as he expects accelerating growth from its defensive portfolio of community and neighbourhood shopping centres. And it has a forward yield of 9%.
But he also sold down Hyprop, which is seeing weaker growth prospects as well as an unrepeatable boost last year from its recent offshore expansion, driven by the charismatic billionaire Louis Norval.
He says Hyprop looks overpriced at a yield of less than 7%. Investec took advantage of some discount bookbuilds to add to MAS and Greenbay, though it took profits on Greenbay not long after, as it rose 20%.
Stuart-Findlay is concerned about the prospects for the UK-focused counters, and some rand weakness gave him the opportunity to sell the position in Hammerson. This no longer fitted into his focus, which is on shares that promise sustainable above-average distribution growth, plus the obvious attractions of good assets, strong balance sheets and good management.
Since mid-year, Investec has reduced its Growthpoint holding considerably from 16.7% to 14.1% while Nepi Rockcastle has been increased from 12% to 16%, Redefine fell from 12.7% to 11% and Hyprop sank from 6.7% to 4.6%. The MAS Real Estate holding has been doubled to 3.4%.
Mazi Prime Property Fund
Mazi is one of a handful of black economic empowerment fund managers (Argon, Kagiso and Taquanta would be others) that have broken into the mainstream.
Fund manager Malungelo Zilimbola is a multiple unit trust award winner, who is backed up by co-manager Asanda Notshe. With its logo being an impressive-looking bull it would have been nice if this fund could have been an alternative property fund, looking at assets such as land and cattle. But alas this is a mainstream bricks and mortar fund, which lacks the Zilimbola flair which has made his equity funds such a tempting buy.
It even has a modest 2.5% tracking error, way below the Mazi equity portfolios. The only share in the property fund that isn’t so popular among the peers is a 5% position in Attacq, a property growth business in the Atterbury stable.
It quite controversially made no promises to pay a dividend when it listed. The fund likes Fortress so much it owns the Bs (9% of fund) and the As (4%). But other than Nepi Rockcastle (12%) which all his peers bought, the fund doesn’t have much appetite for the high-growth offshore shares such as Greenbay, MAS Real Estate and Sirius. But the fund is invested in popular domestic mid-caps Vukile and SA Corporate.
Mazi does not have a reputation as a property manager, not yet at least, but it feels bold enough to charge a performance fee, capped at 1%. It takes 10% of the outperformance of the SA Property Index over a rolling 24 months. It does not, however, give back any fee if there is underperformance.
* Fund data supplied by ProfileData Fund Analytics. The information, data, analyses and opinions above do not constitute investment advice, and all information should be verified before using it. Do not make any investment decision without the advice of a professional financial adviser.
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