Why prop­erty is so pop­u­lar

Financial Mail - Investors Monthly - - Analysis: Financial Services Funds - STEPHEN CRANSTON

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

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