Property funds come up trumps

Published Jul 23, 2012

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Funds invested in the local listed property sector were the star performers over the quarter to the end of June, returning on average 8.92 percent for the quarter. This fund sub-category was also the best- or second-best-performing sector over longer periods up to five years.

Domestic real estate general funds had the second-highest returns over the year to the end of June, with an average return of 22.67 percent, according to ProfileData.

Over three years, this sub-category was the second-best-performing sub-category, with an annual average return of 21.41 percent.

Over five years, domestic real estate funds were also the top-performing sub-category, with an annual average return of 12.06 percent.

The strength of the listed property sector has continued to surprise asset managers, many of whom are wary of investing in this sector at the moment.

Neville Chester, senior portfolio manager at Coronation Fund Managers, says Coronation was surprised by the continued strength of the listed property sector, which was in part driven by low interest rates.

The retail property sector has done particularly well, and this is a reflection of the good times South African retailers have enjoyed, Chester says.

However, he says, the forward yield (based on property’s expected income) on premium quality property stocks is now six percent and this is below the yield you can earn on a local 10-year government bond, despite the higher risk in listed property.

Cy Jacobs, manager of the 36One Flexible Opportunity Fund, the top domestic asset allocation flexible fund over three years, agrees that listed property yields are unattractive relative to those from government bonds, and says his fund moved out of listed property some time ago.

Jacobs says listed property companies have a monopoly on setting rentals, but there is a limit to the increases the economy can endure, and the economy is not that strong.

Chester says Coronation is finding better value in listed property in foreign markets, where the yields are seven, eight or nine percent.

Unit trust funds that invest in global property were among the top performers in the second quarter.

Over one year, the Stanlib Global Property Feeder Fund returned 23.49 percent. Over three years, the Grindrod Global Property Income Fund returned an annual average of 24.56 percent. The global real estate funds can be found in the foreign equity varied specialist sub-category.

Over the past year , the fortunes of funds that invested in the local equity market have been very dependent on how much a fund invested in the industrial and the financial sectors and how little it allocated to the resources sector.

The FTSE/JSE All Share index returned just under one percent for the quarter to the end of June and 9.24 percent for the year to the end of June (with income reinvested), according to ProfileData.

But the resources sector significantly diluted the overall returns, Ryk de Klerk, director of PlexCrown Fund Ratings, says. The FTSE/JSE SA Resources index returned minus 3.34 percent and minus 9.84 percent over the quarter and the year to the end of June.

The FTSE/JSE Financials index returned 4.59 percent and 24.14 percent for the quarter and the year to the end of June, while the FTSE/JSE Industrials index returned 2.6 percent and 19.7 percent.

As a result of these strong returns, domestic equity industrial and domestic equity financial were the leading sub-categories on average returns over the past year to the end of June.

Domestic equity industrial was also the top-performing sub-category over three years, and it was the second-best-performing sub-category over five years.

Domestic equity general funds returned on average 9.48 percent for the year to the end of June and 16.44 percent a year over the three years to the end of June.

There was a wide difference between the returns of the top- and the bottom-performing general equity fund over three years. The top performer, the Foord Equity Fund, returned, on average, 23.33 percent a year, whereas the worst performer, the Element Islamic Equity Fund, returned, on average, 8.53 percent a year over the same period.

Weaker currency helps rand-denominated foreign funds

The depreciation of the rand, careful stock-picking and the demand for global bonds have all helped rand-denominated unit trusts that invest in foreign markets.

In the quarter to the end of June, rand-denominated foreign unit trust funds benefited from a six-percent depreciation in the rand against the United States dollar, Eldria Fraser, chief investment officer of Prescient Investment Management, says.

Paul Hansen, director of retail investment marketing for Stanlib, says a 20-percent depreciation in the rand against the United States dollar over the past year has helped rand-denominated foreign funds over this period.

Over the year to the end of June, the Morgan Stanley Capital World index (MSCI) returned minus 4.4 percent in US dollar terms, but in rands the return was 14.82 percent (according to ProfileData).

Foreign equity general funds returned an average of 9.82 percent for the year to June. Some of this return is a result of the stronger rand and some a result of fund managers’ good stock-picking, Fraser says.

Over three years, the MSCI returned an average of 11.6 percent a year in rands, while foreign general equity funds returned an average of 9.73 percent.

The top-performing foreign general equity fund over both the one- and the three-year period to the end of June was the db x-trackers MSCI US Index ETF, which returned 24.43 percent over one year and 16.83 percent a year over three years.

Over these periods, US shares have done better than the shares of any other developed country, and the US dollar has been stronger than other currencies, Hansen says. The US economy is doing better than those of Japan and the developed countries in Europe, he says.

US company profits (earnings) have reached an all-time high in US dollar terms and have surpassed levels before the 2008 market crash levels, Hansen says.

Concerns about the US’s debt, which, on a debt-to-gross domestic product basis is higher than that of European countries, has led to a debate about whether the US equity market will continue to deliver good returns. Hansen says the consensus view appears to be that funds should remain overweight in US shares relative to their global equity benchmarks.

Stanlib’s Equity Feeder Global Fund, which is managed by London-based asset manager Origin, has an MSCI benchmark that includes emerging markets. The fund is overweight in US and emerging market shares and underweight in European shares relative to the benchmark.

Hansen says the arguments for remaining overweight in US shares are that company profits are good, US house prices appear to be stabilising, households’ debt repayments relative to disposable income have fallen and the dollar is likely to stay strong.

Investor concerns about the US relate to a number of tax increases and spending cuts scheduled for next year and which are expected to weigh heavily on growth, Hansen says.

When deciding where in the developed world to invest, fund managers must consider that shares in Europe have become very cheap, and if there is a recovery there, investors could do better in Europe than in the US, he says.

Fraser says the US market is not as cheap as some investors argue – they are comparing current share prices with those that prevailed at the height of the US property bubble, rather than with the prices that have prevailed for longer periods.

But she warns that while European shares are cheap, they may stay cheap for some time to come.

US companies tend to be more entrepreneurial and can recover from setbacks quicker than those in other countries, Fraser says.

Economic growth in the developing world is strong, she says, and Prescient’s Balanced Plus Quant Fund, for example, has five percent of the fund invested in African equities.

Foreign bond funds have delivered strong returns for local investors over the past quarter (5.83 percent on average) and the past year to the end of June (21.33 percent).

Hansen says global bond yields have fallen sharply, causing the price of global bonds to rise rapidly.

A high demand for global bonds has resulted in price appreciation, because investors fearful of the uncertainty in global equity markets have sought what they regard as safer investments in bonds, despite low interest rates, he says.

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