Why property is so popular
At one time the sector funds were popular with certain financial advisers who believed they could add value to their clients by giving a direct stake in industrials, resources or financials at the right time.
Now these funds have barely 1% of unit trust assets even when their totals are combined. Financial funds have just R3.9bn under management, split between six funds and a Satrix passive fund. In fact, the only popular sector funds are in property, with R70bn under management.
Property, however, is an asset class in its own right, which is not true of the three equity sector funds. And investors buy property for yield as an alternative to bonds. Financial funds are entitled to invest in property shares as they make up 28% of the financial index. But none invests more than 8% of its portfolio in the sector. It is simple: they have a handful of key clients, mostly multimanagers or designated investment managers (the likes of Analytics and PortfolioMetrix) who want an exposure to banks and life offices from their financial funds, as they can buy property exposure separately.
Property is most attractive as a way to get rand hedge exposure in what is inevitably a primarily domestic-focused financial sector, except in the large financial centres such as London and Singapore. Capital & Counties and Intu, the two components of the former Liberty International, are almost entirely pound-sterling-based businesses. They are still a lot more popular among financial fund managers than some of the more recently listed rand hedges such as Nepi, Rockcastle, New Frontier or International Hotel Group.
The so-called financial sector, though, covers a multitude of sins. You would have thought it would be odd to invest in tobacco in a financial fund, but Reinet is a meaningful part of the index with a R65bn market cap. It is a share held by most funds, though they steer clear of other essentially industrial businesses such as Zeder, an agricultural holding company, or an industrial holding company with interest in fishing and clothing such as Brimstone.
A typical financial fund would be Stanlib Financials. We have not included it in the featured funds as portfolio manager Lebogang Molebatsi left at quite short notice to become head of equities at the Public Investment Corp. Theo Botha, an industrial specialist, is holding the fort until a permanent appointment is made, so rather wait until this limbo period is over. Nonetheless it has features in common with the rest of its peer group.
The fund is dominated by Old Mutual — easily the most popular share among the sector funds — and Standard Bank, the fund’s ultimate controlling company. Investors buy these funds as a way to buy exposure to banks and life offices and the fund managers take cognisance of benchmarks, though they are small enough to be a lot more flexible.
Like most of the financial funds, Stanlib has chunky holdings in FirstRand and Investec, through Investec Plc and Investec Ltd. Unusually it has a 5% investment in Growthpoint, in preference to the popular UK-based property shares. Growthpoint is considered the most convenient proxy for the SA property market (with a bit of Australian real estate as well).
At the start of the year the bank share prices were particularly bombed so it is not surprising the funds have continued to accumulate these shares. The more expensive life offices, such as Sanlam and Discovery, have generally been lightened to leave room for the banks.
Of the big four Nedbank has been paid least attention, in part because the funds have Nedbank shares indirectly through Old Mutual. Managers are curiously neutral about the impending distribution/unbundling of Nedbank shares. They have been more proactive on Barclays Africa, in aggregate reducing positions in anticipation of an overhang of shares as Barclays Plc sells out, as well as the practical implications of turning independent.
Financial Services is not a sector with stark differences between funds. Apart from the property holdings, the other differentiator is the holding in fully external (not dual listed) shares. The Nedgroup and Sanlam funds have external shares; Momentum, Stanlib, Coronation and Old Mutual do not.
But as Kokkie Kooyman, manager of the Nedgroup fund, points out, for most of the past 11 years (when he has managed the fund) the offshore holdings have underperformed local financials. It has been a good sector for the long term with good management teams, and though the short-term prospects are unexciting the long-term trend is in your favour.
Property, however, is an asset class in its own right. And investors buy property for yield as an alternative to bonds