By: Fairtree Capital
Niche global real estate fund gives investors foreign exposure without using offshore allocation
A niche South African global real estate fund which gives investors foreign exposure without using offshore allocation, outperformed the index by 4% in its first year of operation thanks to a strategy the portfolio managers refer to as ‘three bites of the apple’.
The Fairtree Global Real Estate Prescient Fund was up 6.49% (USD), outperforming the benchmark by 4.08% (gross performance, before expenses & management fees) after it’s first year of operation.
“We follow a top-down lead investment approach, which gives us three bites of the apple to generate alpha. Our team starts with the geographical overlay of country selection, then moves on to sector selection, and finally stock selection” said co-Portfolio Manager, Rob Hart.
“We run a concentrated portfolio of 30-40 stocks, which tick the boxes in terms of country, sector and stock criteria. We cannot hug our benchmark (which comprises 331 stocks) or accumulate stale ideas – if it’s not working, it’s likely to be replaced by another, better idea. As a result, we end up with a high conviction, best ideas portfolio”, he added.
According to fellow Portfolio Manager Ryan Cloete, the divergence in country and sector performance also supports the argument for active vs passive management.
“There is an enormous divergence in listed real estate returns across the various countries in which we invest. For example in 2017, Singapore Developers were up c. 45%, while Japanese REITS were down c. 5%. Furthermore, from a sector perspective, US Data Centers were up almost 30%, while US Shopping Centers were down -11% over the same period. This shows the importance of country and sector allocation, before we even begin on the selection of specific stocks to put in to our portfolio. It is also a very compelling argument for active asset management,” said Cloete.
Caption: The divergence in 2017 and 2018 year-to-date performance across the real estate markets within the Fairtree Global Real Estate Prescient Fund’s benchmark, which goes to the importance of country selection.
Caption: This divergence in performance is further illustrated by the returns from the various US REIT sectors as shown above (goes to sector selection).
“We are also active in our management of cash. When we are cautious on the market, we will increase our cash position to reflect this, thereby mitigating investors’ exposure to a pullback in the market,” added Cloete.
Hart spent nearly two decades living in Asia covering property stocks there, so he knows the markets extremely well, hence investors receive a much larger exposure to Asia through this fund than through competitors’ funds.
“We have chosen a benchmark that includes both Real Estate Investment Trusts (REITs) and developers, as opposed to our competitors that trade REITs exclusively. Because a significant portion of Asian real estate companies are developers, our Asia weighting is close to twice that of our competitors.” This Fund’s benchmark comprises 21% Asia (Japan, Hong Kong & Singapore), whereas most of the competitors’ benchmarks comprise 11% Asia.
“We will often overweight our Asian benchmark due to our knowledge and experience in the region, while competitors will be underweight their (smaller) Asian benchmarks for the opposite reasons, resulting in inventors receiving a much larger Asian exposure through our fund,” added Hart.
In 2018, the team identifies Europe and Singapore as favourable geographies; industrials and residential as favourable sectors, and currently hold large positions in Colonial, City Developments, Prologis and Invitation Homes.
“The Fund will geographically retain an overweight positioning in Europe, where the combination of a synchronised economic recovery combined with slack in the labour market yields a desirable macro backdrop for property stocks,” Hart commented.
Hart added: “We are underweight in the US because it is further along the economic cycle, with interest rates already rising, and with fiscal stimulus pushing the economy towards overheating. We are also overweight in Singapore which is experiencing a synchronised property recovery across the property sectors after a few years of oversupply.”
“From a sector perspective we retain our overweights in industrials combined with an underweight in retail on the back of the shift from brick and mortar to online retail. We are overweight the residential sector on the back of strong demographics and limited supply, particularly in single family rentals and manufactured housing,” added Cloete.
The team also attributes the Fund’s success to the value offered by being part of a strong, corporate brand. “We leverage the Fairtree brand, giving us better sell side and corporate access. In 2017 we attended 128 meetings with offshore company management teams, which play a crucial role in our investment decision making,” said Cloete.
By: Fairtree Capital