PropertyMay 20 2013

Fund Review: First State Global Property Securities

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As a member of the Investment Adviser 100 Club of consistently outperforming funds, the £201m First State Global Property Securities fund has produced strong long-term results, ranking top quartile in the IMA Property sector in the past three and five years.

Launched in September 2006, the aim of the fund, according to manager Stephen Hayes, is to deliver superior risk-adjusted real estate securities returns by investing capital efficiently on a globalised basis.

Unlike some members of its peer group, which invest directly in property assets, this fund invests in a broad selection of securities issued by real estate investment trusts (Reits) or companies that own, develop or manage real properties from around the world.

Mr Hayes, the head of property securities at First State who took over the fund in September 2012, explains: “The investment process revolves around active stock selection, with the ability to be conviction-based when pricing anomalies are identified.”

Mr Hayes says the investment process can broadly be divided into six elements, including a defined screen. The initial defined screen is applied to the greater investment universe and stocks/markets must pass every screening variable – such as regulatory policy and political risk, liquidity risk and financial risk – to be considered eligible for investment.

The manager adds: “Any Reits/companies that pass the initial screen then undergo a process of fundamental bottom-up research, involving the assessment of physical real estate markets and stock forecasting.”

Once these stages are passed, the potential securities are valued, ranked and further assessed to determine active weight recommendations that are then adjusted for liquidity constraints, before undergoing a final portfolio risk assessment and negative screen to avoid concentration risk.

Long-term performance from the fund has been strong, with a five-year cumulative return of 56.8 per cent to May 3 2013, which, according to the latest fund factsheet, is slightly behind the UBS Global Real Estate Investors index return of 59.9 per cent. However, this is more than 10 times the IMA Property sector average return of 4.72 per cent, according to Morningstar.

In the shorter term the fund has slipped, with a return of 16.96 per cent in 2012 compared with 19.45 per cent from the index and 12.44 per cent from the IMA Property sector. Mr Hayes admits: “The fund’s relative performance has not kept up with a booming Reit market, although over the longer term the fund has demonstrated very good outperformance.”

Australian Reits have helped boost the performance of the fund, according to Mr Hayes, who highlights the performance of The Mirvac Group. In contrast US apartment Reit Avalon Bay, a top 10 holding, has performed less well, with a loss of 2 per cent in the past 12 months.

With property beginning to come back into vogue, this fund offers a strong long-term track record and a disciplined investment approach. Although Mr Hayes has led the team for less than a year, it is a role he has previously held at First State between 1999 and 2006 before leaving to found his own property boutique Perennial Real Estate Investments in Australia – for a long-term investor willing to take some risk, this fund is a strong pick.

EXPERT VIEW

Geoff Mills, managing director, Rayner Spencer Mill:

The fund combines a top-down macro view with portfolios put together after discussion. Manager Stephen Hayes was promoted from the US team, which has ensured continuity. The fund has performed well and First State has a well-resourced specialist team that looks likely to continue to add value. The team has been expanded and now has a strong regional input, making us believe this is a good option for a broadly uncorrelated portfolio.