Global property funds enjoy a good year

Equities in the property sector have delivered a positive performance in the last 12 months (as at 2 Dec 2015), albeit lower than the wider equity market. The FTSE EPRA/NAREIT Developed Index gained 15.4 per cent in euro terms while the MSCI World was up 16.8 per cent. Funds in the Morningstar Property - Indirect Global category have slightly outperformed the index with a 15.8 per cent progression on average.

A number of factors have supported the sector. In a low interest rate environment, some investors have favoured real estate investment trusts (Reits) for their dividend stream. Also, the modest pace of the global economic recovery has slowed down construction in some markets and has maintained a balance between supply and demand forces, thereby supporting property valuations.

In Europe, the listed real-estate sector was seen as a defensive play and built most of its outperformance during the third quarter of 2015 as worries about China and emerging markets unfolded and dragged equity markets down. The FTSE EPRA Europe Developed NR returned 22.9 per cent over the last 12 months, far ahead of the MSCI Europe index (+12.1 per cent). The Morningstar Property – Indirect Europe category average gained 24 per cent.

NN (L) Global Real Estate, rated Bronze by Morningstar, returned 13.6 per cent over the past year, ranking in the third quartile of the Morningstar Property – Indirect Global category. Stock selection was fruitful in the US but an overweight in Japan, a few missteps in the UK, and a small exposure to some emerging markets dragged the fund down. Nonetheless it remains a solid proposition in this sector. The fund benefits from a very experienced management team. The lead portfolio manager Michael Lipsch has 25 years of relevant experience and has a good long-term track record on the Dutch-domiciled fund, managed using the same strategy. Since 2004, Mr Lipsch has been assisted by co-manager, Andrej Antonijevic, who has a complementary quantitative background. The investment process is a combination of top-down allocation and bottom-up selection, with a focus on the latter. The managers aim to reduce risk by using clusters of stocks that display low correlations with each other.This approach allows them to run a concentrated portfolio of around 30 stocks.

Schroder ISF Global Property Securities, rated Neutral by Morningstar, outperformed over the past 12 months. The fund gained 17 per cent in euro terms, a 1.2 per cent lead over the global category average. It benefited from good stock selection, particularly in the US and UK, where more than 60 per cent of the portfolio’s assets are invested. These early results for the new team behind this fund are promising. Schroders brought the management of the strategy in-house in August 2014 and hired Tom Walker and Hugo Machin from AMP Capital to head the team. They were previously involved in the management of the AMP Capital Global Property Securities fund and boast more than a decade of industry experience. The duo’s process is primarily bottom-up, requiring scoring of risk factors and the calculation of a target price by the locally based analysts. The new co-managers are attempting to implement a sensible approach but our Neutral rating reflects the brevity of the managers’ track record both here and more broadly in running a global property fund.

AMP Capital Global Real Estate Securities, rated Bronze, beat the global category average over the past 12 months with an 18.7 per cent gain. The fund ranks in the first quartile for that period. Outperformance was achieved through strong selection across all regions, with the exception of Australasia, which had a small negative impact on returns. The fund benefits from an extensive team of local experienced portfolio managers and analysts under the leadership of fund manager and team head Matthew Hoult, who joined AMP Capital from BNP Paribas Asset Management in 2012. Under his leadership the process has been tweaked and team members encouraged to take on greater accountability, both of which we view positively. Mr Hoult, whose investment experience spans nearly two decades, is well-backed by deputy global portfolio manager James Maydew. While this fund was only launched in March 2014, it follows its Australian-listed counterpart, AMP Capital Global Property, which has an excellent long-term track record.

Finally in Europe, AXA WF Frm Europe Real Estate, rated Silver by Morningstar, returned 24.6 per cent, slightly ahead of its European peers (24 per cent) and the FTSE EPRA Europe Developed index. The fund generated its outperformance mainly from both an overweight and security selection in the UK. It is managed by Frédéric Tempel who has been a successful investor in real estate stocks for more than 10 years. Three managers, organised by geographical region, with one dedicated to Europe, support Mr Tempel in the analysis and management of the fund. He targets real estate stocks in Europe that he considers of quality by first excluding companies with poor transparency in terms of corporate governance. He then uses fundamental analysis to assess the viability of the business model, the valuation and the identification of catalysts. This investment strategy has proved its worth over time with above average risk-adjusted performance since its inception in 2009.

Mathieu Caquineau, senior fund analyst, Morningstar