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    Seed Weekly - SA Listed Property

    Managing money is largely about asset allocation. Asset allocation is the process where a manager decides what percentage of the money being managed is allocated to which asset class. Broadly speaking, the main asset classes are Equity (Shares), Bonds, Cash, Property and Alternative/Other (Alternative is everything that cannot be easily classified as any of these other asset classes, some examples being Hedge Funds, Private Equity, Currency Futures). There is also the option to invest domestically only in these asset classes, or offshore, as well as the option to do both.

    I will be focusing only on the local South African listed property asset class. The South African Listed Property Index, better known as the SAPY, comprises all the property companies listed on the JSE. Compared to the other local indices, it is fairly constrained in that it currently consists of only 21 companies.

    An active manager seeks to outperform an index by over/under weighing companies in the index compared to the weight in the index. It has proven difficult for managers to consistently outperform the SAPY index. One of the main reasons for this is only five of the companies in the index have a combined weight of more than 60% (refer to the chart below). If a manager decides to significantly over/underweight any or all of these 5 companies, they will also out/underperform the index by a great margin. In other words, the performance from the SAPY is very much influenced by these five companies. There are also a lot of companies in the index with a smaller market cap, which means some bigger asset managers cannot access them due to size or mandate constraints.

    Source: Peregrine Weekly, Seed Investments 23 January 2017

    Performance

    When looking at historical performance on a risk adjusted basis, local property is the leading asset class over a 3, 5 and 10 year period (refer to the chart below).

    Interesting to note, is that the ALSI (all share index) only outperformed the SAPY in two of the last ten years, and that during the last two years when we had volatile markets, that have gone mostly side-ways, listed property outperformed equity comfortably.

    Source: Avior Research, Seed Investments 23 January 2017

    Seed Allocation

    At Seed, we have always had a significant allocation to local listed property throughout our multi asset funds and portfolios, and by looking at the above performance it is clear that this has been a great driver of the Seed fund returns.

    In the Seed Balanced fund, our average property allocation over the last 5 years is 13%. Currently, our property allocation in the same fund sits at 14.2%. This is a much higher allocation compared to our larger competitors. The current average property allocation of the five biggest funds in the Multi Asset High Equity Category (Balanced Funds) is only 5.02%, and is close to the SAPY weight in the ALSI. The the reason for this might be that, due to their fund size, they are constrained to invest only in those five or six shares that make up more than 60% of the SAPY and are liquid enough.

    We generally advise our clients to invest in multi asset funds, specifically to diversify and spread the risk across all asset classes.

    It is important, in my opinion, to always ask your advisor/investment specialist if you have sufficient exposure to property, because it might be much less than you had expected or assumed.

    Kind regards,

    Renier Hugo

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

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    Permalink2017-01-25, 10:40:02, by Mike Email , Leave a comment