This article was first published in the second quarter 2017 edition of Personal Finance magazine.
There isn’t a Raging Bull Award for the best South African listed property fund, but if there were, the Absa Property Equity Fund would surely win it. For three years in row, the fund has walked off with the Raging Bull certificates for top straight performance over three years and top risk-adjusted performance over five years by a domestic real estate fund.
And the fund hasn’t shone only in relation to other real estate funds. It outperformed all other rand-denominated funds over the 10 years to December 31, 2016, with a return of 17.72 percent a year, according to ProfileData. It was the second best rand-denominated unit trust over three years, the third best over seven years, and fourth over five years to the end of last year.
The listed property sector has been very good to investors over the long term, so is the fund’s performance merely a case of “a rising tide lifts all boats”? Not really. As Table 1 shows, many of the funds in the South African real estate general sub-category failed to rise with tide. Over the three-year period to the end of last year, for example, only 12 out of 30 funds beat the sector index, the FTSE/JSE SA Property Listed (SAPY) Index, while more than half of the funds underperformed the peer-group average. The results are even less encouraging over longer periods. Over the seven years to the end of last year, only three out of 19 funds beat the index, while over 10 years, only two of 14 funds did better than the SAPY.
Fayyaz Mottiar, who has managed the fund since January 2011, says the fund’s performance is a result of its highly flexible investment mandate. Unlike virtually all the other funds in the sector, the Property Equity Fund does not take the constituents of the SAPY Index as its starting point when selecting securities.
A comparison of the top 10 shares in the Absa Property Equity Fund and the constituents of the Coreshares Proptrax SAPY exchange-traded fund highlights how Mottiar’s investment approach results in a portfolio that differs significantly from the index (see Tables 2 and 3).
Investors who invest in funds that follow the benchmark, going slightly under- or over-weight in certain counters, are essentially paying active-management fees for a passive investment, Mottiar says. A bigger problem, he says, is that these funds are unable to manage risk properly. A highly active approach means that investors can be protected against the risk of capital loss.
The aim of the Property Equity Fund is to provide the highest risk-adjusted total returns – in other words, says Mottiar, the potential to earn higher returns is weighed against risks, so that in the event of the market or a security losing value, investors lose as little of their capital as possible.
Mottiar is a bottom-up manager – in other words, he researches the fundamentals of companies: their physical property assets, including how well they are maintained and where they are situated; rental escalations; tenancy levels; lease renewals; and the extent of the competition in their particular area. He also looks at the quality of a company’s management and its growth strategy.
He considers a number of metrics when valuing a share, such as its annualised average yield, its annual growth, gearing (debt relative to equity capital) and net asset value. For Mottiar, the most important metric is the income the share can generate for investors. Do the distributions justify the price of the share?
As stated above, the fund is focused on total returns (the combination of income and capital growth). Mottiar ranks shares based on their expected total return, made up of their annualised average yield, expected growth over one and two years, and their expected relative exit rating (or the yield for which one would be willing to sell a share).
The fund gives a weighting to shares that are expected to produce the best performance over the long term. The mix of shares and their weighting in the portfolio are influenced by “top-down”, or macro, factors, such as possible movements in the rand and interest rates, and the investment cycle. Mottiar also gives a weighting to securities that could provide the fund manager with opportunities to take advantage of pricing anomalies and corporate actions.
The fund’s highly pragmatic approach also means it will move into cash if Mottiar cannot find suitable buying opportunities, or needs to protect against capital losses when markets are volatile. However, as Mottiar points out, volatility – as we have experienced recently – is also an opportunity to pick up quality shares at discounted prices.
Looking ahead, Mottiar says the portfolio is positioned to weather the volatility that is expected to result from uncertainty over interest rates in the United States, the implications of Brexit and US President Donald Trump’s economic policies, political developments in South Africa and movements in the rand.
The fund is 85-percent invested in shares with a free-float market capitalisation (the proportion of shares available for trading) of more than R3 billion. Usually, the larger a share’s free float, the less volatile it is. At least 50 percent of the fund is invested in the 10 most liquid shares in the listed property sector. The fund has a cash holding at any one time of between five and 30 percent.
Mottiar says the fund is currently targeting a return of between two and four percent above the SAPY Index. The fund aims to provide investors with a yield of about seven percent and income growth of between eight and nine percent a year.
Launch date: August 14, 2006.
Fund classification: South African real estate general.
Objective: to provide investors with income and growth over the medium to long term at medium to high risk, predominantly obtained in the South African listed property market.
Benchmark: FTSE/JSE SA Listed Property Index.
Advisable minimum investment term: three years.
Assets under management: R2.1 billion (at February 28, 2017).
Fees (including VAT): initial fee: none; annual management fee: 1.71 percent (class A fund); 1.14 percent (class C1 fund); performance fee: none.
Minimum investment amount: R1 000 lump sum or R200 a month.
Source: Absa Asset Management