Stanlib, the country’s largest unit-trust company and an early proponent of listed property investment, has shed light on the category’s success.
Listed property funds retain their place as investment industry favourites because they “hug” their investors rather than the sector index, says Evan Jankelowitz, property analyst and assistant fund manager at the Stanlib Property Income Fund, the category flagship with a fund size of more than R2,7-billion.
In the past four years, an actively managed unit trust like the Stanlib Property Income fund has achieved total returns of 240% versus CPI of 16% and CPIX of 21,9% — a success rate that would normally put a category beyond criticism, yet some have objected that performance is merely a result of “hugging” the property index.
Technical issues have had no effect on the appeal of active management in the listed property field. The reason? “We hug our investors, not the index,” says Jankelowitz. “We understand our investors’ needs. Our mandates reflect their priorities.
“Our investors are not entirely risk adverse, but they expect us to act prudently in a hybrid category that reflects the behavioural characteristics of both the bond and equity markets.
“We are extremely conscious of the investor’s risk profile. We seek out-performance, but out-and-out aggression does not sit well with our investor’s need for solid income streams backed by quality property portfolios. Closeness to our customers is more evident than closeness to any index.”
Respect for risk factors was showcased in June and July when interest-rate increases caused some market softness and the Stanlib Property Income Fund reduced its property exposure to 87% by increasing its allocations into cash and fixed-interest instruments.
On occasion, the fund varies by 40% from the overall composition of the listed property index; in technical terms, creating a reasonable tracking error and thus a commitment to alpha potential in a considered move to out-perform the sector.
Variance to this extent is unusual, however, in view of the category’s special characteristics.
Though listed property is highly popular, its growth is a recent phenomenon. Total market capitalisation of the approximate 26 companies currently in the sector is less than R100-billion. A single JSE counter in the banking category could top that on its own. The free-float of shares available for trading is even lower, at about R77-billion.
The Collective Investment Schemes Control Act precludes funds from allocating more than 5% to a single company with a market cap of less than R2-billion. This limits the allocations that a portfolio such as the Stanlib Property Income Fund can make into any of the smaller, illiquid counters in this restricted universe.
Evan says this restriction is regarded as a valid risk precaution by investors that expect managers to follow a set strategy rather than make extravagant market “plays”.
He adds: “Our investors buy into a two-tier value proposition — a steady income driven by quality rental streams and quality property portfolios that hold the potential for long-term capital growth.
“There have been questions about our lack of support for some of the smaller property companies, but they often don’t fit the profile preferred by our investors as the rental component is absent. Stellar capital gains can be impressive, but we offer a double rather than a single value proposition.
“If we forget that, we could upset customer relationships. We don’t bug our investors. We hug them.”