Advance Property Securities Fund
Sydney Morning Herald
Wednesday November 12, 2003
Why it is topical Listed property trusts (LPTs) have provided bumper returns for investors. But with an improved outlook for global economic growth and last week's interest rate rise, it's going to get tougher for LPTs and the properties securities funds, the managed funds that invest in them.
The nature of the sector is changing. Mergers between LPTs have led to fewer, larger ones dominating the market. And that is likely to make it more difficult for managers to outperform the market returns and to justify their active management fees.
Advance's Property Securities Fund is a good case in point that illustrates the difficulties faced by managers.
The fund has returned an annualised 10.21 per cent, after fees, for the three years to September 30, compared to the 11.15 per cent return of the S&P/ASX200 Property Trust Accumulation Index. The fund is not cheap. Fund researcher Morningstar, who last week put out a report on Advance's capabilities in Australian listed property, says the fund's management expense ratio is 1.79 per cent a year, which is higher than the industry average.
What it does Advance's affiliate company, St George Investment Management, manages the fund. Both businesses are owned by St George Bank.
Morningstar says St George Investment Management's investment process is centred on consensus valuations of the LPTs. The manager reviews the broker data on valuations on the LPTs. This allows the manager's research resources, which Morningstar says are "limited", to be focused on assessing investment risks, rather than on the time-intensive mechanics of financial modelling.
How it fits in The manager is looking for consensus-driven valuations and manages with a disciplined risk focus, and the fund is performing in line with the benchmark. "The process is reasonably transparent, and can be replicated, although is unlikely to offer cutting-edge insights to stock selection,"
says Morningstar, and portfolio decisions are made by one portfolio manager, with "limited personal backup".
A feature of the listed property sector over the past couple of years is the increasing globalisation of property. Listed property is one of those stalwart investments of retiree and income investors, because they can easily appreciate the way a property trust works: they own buildings and collect rent.
However, the Australian investor's appetite for investing in bricks and mortar means there's a shortage of investment grade property, so the trusts are including more offshore property in their portfolios - and that comes with exchange rate risk. Furthermore, property trusts are earning more of their revenue from involvement with apartment developments and property syndicates. There's nothing the matter with that as long as the properties securities manager is aware of the implication of such a changes in the risk versus reward characteristics of the LPT.
Worth buying? Morningstar says that Advance needs to do more fundamental analysis to provide deeper insights into an LPT than the broker consensus approach it uses. Morningstar gives Advance a sector strength rating of only two out of five in Australian listed property: "The process [the manager] has for dealing with the internationalisation of the LPT [sector] is not as extensive as many other managers." Morningstar notes that the manager is building new financial models that should provide deeper insights into an LPT.
© 2003 Sydney Morning Herald