FA news - Digging deep to find value

by Malcolm Holmes

The face of the South African listed property market has changed markedly over the past 16 years.

Not only has the number of collective investment schemes investing in property risen dramatically (to the current 43), but the key drivers of the listed property market have changed as well. This has made it harder for investors to understand what they are buying.

MASSIVE GROWTH

In 2002, South Africa’s property sector consisted of a few locallyfocused, illiquid shares with a total market cap of about R10bn and an income yield of around 16%. Today, the market cap of the sector is more than R500 billion, there are over 40 different property shares, liquidity has increased tenfold and the income yield of the sector is closer to 9%.

Today, many listed property companies own a mix of retail, commercial and office exposure. Further, they have expanded into Europe, the UK, US and Australia. Several offshore property companies like Hammerson PLC have secondary listings in South Africa. Cross-ownership adds to the complexity, as shown in the Resilient stable of companies.

This complexity makes it difficult for the average investor to differentiate between the companies and the collective investment scheme (CIS) products that invest in them. Unlike the broader equity market, there are no sector classifications to help distinguish between size, sector, sub economic industries and geographic exposure in the property space.

Using only the quarterly fund factsheet will not help investors to understand how or why one fund will perform relative to its competitors if the rand strengthens, Brexit is concluded successfully, local interest rates rise, or the issues relating to the Resilient group are positively resolved.

UNIQUE CREATIVITY

In 2018, in response to the introduction of the FTSE / JSE All Property Index, STANLIB Multi-Manager completed an exercise to classify the different property offerings. The results were extremely interesting.

We defined a series of categories, which we call buckets, into which we put property shares with similar qualitative characteristics. These similarities were validated using quantitative methods, giving us a high degree of confidence, not only in the primary characteristic of each bucket but also in the constituents.

We also separated the benchmark into the same buckets which allowed us to compare it with a property CIS.

Using this process, we have identified the following buckets or groupings of shares.

Based on these buckets, we highlight the market cap-weighted split of the benchmark FTSE / JSE All Property Index at the end of December 2018.

BENCHMARKED PERFORMANCE

Creating an equally-weighted index of the companies in each of these buckets, we tracked the historic performance of the buckets and compared it with the market. The following chart shows how they performed against the All Property Index between September 2017 and 31 December 2018.

This performance data and the holdings per bucket of a property CIS were compared with the benchmark. A manager’s alpha can be analysed by breaking down the contribution from each bucket. Positive alpha can come from being overweight in a better performing bucket or through good stock selection within that bucket.

In the chart below, we highlight the relative positioning of one of the STANLIB Multi-Manager Property funds, together with the resulting attribution for the quarter ended 31 December 2018.

This analysis shows the collective wisdom of the selected underlying managers of this fund was to underweight the large South African hybrid property companies and overweight the small and mid-South African hybrids.

The fund was underweight South African Inc – possibly worried about a weak local economy and its impact on property fundamentals – and underweight the UK PLC’s, which possibly reflects managers’ concerns about the effect of Brexit on UK property.

These positions either excelled or lagged relative to the markets, reflected in the alpha column. It shows the largest contributor to the fund’s 0.97% positive alpha during the quarter was its underweighting in the UK PLC’s, which were down 16% during the period – adding 0.5% to the fund’s total alpha.

BETTER TECHNIQUES NEEDED

Given the increased diversity of the listed property market in South Africa and the lack of neat sector breakdowns, we need better techniques to understand how managers build property portfolios and what drives their returns.

Refining these categories is part of the multi-manager process and we believe they will provide unusual and valuable insights in building multi-manager solutions for investors as the sector continues to evolve.