This £74.5m fund was launched in April 2010 with the objective of providing exposure to liquid real estate in the form of pan-European property shares.
It sits in the Investment Association Property sector and aims to outperform its benchmark – the FTSE Epra/Nareit Developed Europe Capped index – through a fundamental, research-intensive, bottom-up stock selection process.
Alban Lhonneur, who manages the fund with deputy manager Marcus Phayre-Mudge, explains the thinking behind the investment process. “We strongly believe that the degree of comparability among companies is unmatched compared with other equity sectors,” he says.
“Business models [mostly rentals through a property investment portfolio] and geographical remits are very similar once the sector is dissected appropriately into property sub-sectors. We aim to produce alpha through stock selection by comparing and contrasting forward valuations within each sub-sector, with a qualitative overlay based on management teams.”
The manager notes the team tends to pay little attention to country exposure and instead focuses primarily on its 30 proprietary sub-sectors, such as German residential and central London offices. The fund’s allocation to each sub-sector is broadly in line with the benchmark within a tolerance level of +/- 1.5 per cent.
Although the fund “retains a directional long bias”, Mr Lhonneur explains it has the added flexibility to use short positions in individual stocks. “This is particularly pertinent for the pan-Europe-listed real estate sector, which is highly fragmented in spite of a total market cap of €220bn [£159.4bn],” he says.
“Indeed, 62 of the 92 index constituents have an individual benchmark weight of less than 0.75 per cent, representing just 24 per cent of the sector market cap. These 62 firms are typically under-researched and under-covered by the investment community. By being able to implement a sizeable negative conviction on these small and mid-cap companies, not only can we improve the risk profile of the portfolio, but also fully utilise our investment universe.”
The adoption of an enhanced long-only approach means the fund sits at a risk-reward level of six out of seven, the key investor information document shows, while the ongoing charges for the B-accumulation clean fee retail share class is 1.51 per cent.
Since launch, the A-share class of the fund has returned 89.08 per cent to June 10 2015, significantly outperforming its benchmark’s gain of 64.86 per cent. Meanwhile, its peers in the IA Property sector lagged behind delivering just 39.11 per cent, data from FE Analytics shows. The portfolio has also beaten both its benchmark and sector across one, three and five years, posting a 12-month return of 12.46 per cent.
This performance is in spite of a tricky start when the fund launched shortly before a -17 per cent market correction at the time of the Greek bailout package in May 2010. Mr Lhonneur notes: “The following five years have been characterised by the European government debt crisis, unconventional central bank actions and numerous risk-on, risk-off phases. We believe our risk-controlled investment process, including modest sub-sector index deviation exposures, has proven capable of navigating through this heightened level of volatility.”
Recent changes to the fund include a reduction in exposure to Belgian and German offices, large-cap UK shopping names and residential exposed Swedish companies.
Among the top contributors to performance have been German residential landlord Gagfah following a takeover bid from Deutsche Annington. Meanwhile, the main contributor in 2015 has been the “top conviction call in Unite Group” – a student accommodation investor – on the back of an improved earnings and dividend outlook. Holdings that have performed less well include Klövern, which rerated due to increased investor appetite for secondary quality properties and high leverage in anticipation of asset value inflation in Sweden.
Mr Lhonneur remains optimistic on the outlook for property as the historically low corporate and sovereign bond yield environment exerts an unprecedented hunt for yield.
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct
This fund is co-managed by [deputy manager] Marcus Phayre-Mudge, who is perhaps better known as manager of the TR Property Investment Trust. This open-ended fund differs from the trust in that it contains no physical property. It also has the ability to short and vary its net exposure. The fund benefits from an experienced and highly capable team running a high-conviction portfolio. Performance has been strong since launch, though a factor to take account of for the B-share class is a performance fee of 15 per cent of returns above its benchmark.
