Bank of Japan’s $1.4trn (£900bn) quantitative easing programme has created a favourable environment for the countries real estate securities market, according to the managers of the £29.5m JPMorgan Global Property Securities fund.
Kay Herr, who manages the fund alongside Jason Ko and client portfolio manager Michael Hudgins, explains that the fund provides investors with broad market exposure to real estate markets, investing in real estate investment trusts (Reits) and real estate securities, adding that investors should look to hold the fund for “five to 10 years”.
The fund’s process is based on selecting stocks from the bottom up, with a focus on the valuations of real estate securities relative to both their cashflow and underlaying real estate.
Ms Herr says: “We are in regular email/conference calls with the analysts around the globe looking for investment opportunities in stocks where we see a valuation that is achievable on the basis of their cashflow and underlying real estate.
“We have on-the-ground research analysts in New York, London, Tokyo and Singapore and they are speaking the same investment language. Historically – since inception – the majority of the alpha and performance comes from the bottom up stock selection.”
The fund currently has a 16.3 per cent exposure to Japan’s real estate market, but the managers admit that a lack of exposure to the Nippon Building fund was the largest stock-level detractor in the first quarter of 2013. “[This] partially offset the positive contributions from other Japanese stocks. Investment performance in Japan, Hong Kong and Canada accounted for the largest positive contributions to relative returns, with stock selection and allocation proving beneficial in all three markets,” the managers note.
Mr Hudgins adds that monetary policy around the globe is throwing up interesting opportunities. “What this does is keep bonds low and keeps debt pots very attractive , which is good for Reits because they can use that capital to create value,” he says. “Valuations perhaps look expensive when compared with equities, but they are fair when compared with the value of their real estate, and they look cheap versus bonds.”
Since inception in September 2006, the fund has returned 6.68 per cent against the IMA Property sector average loss of 0.68 per cent, according to FE Analytics. This, Ms Kerr says, is a direct result of the bottom-up style adopted by the team.
On a five-year basis, which captures the latter part of the financial crisis, the fund outperformed its peer group by 2.32 percentage points and its three-year performance figures show it more than doubling the returns from the sector.
Ms Kerr says: “Looking at the three-year attribution on the fund, outperformance came from positive stock selection in the US and Japan, owning names like Simon Property Group and HCP Inc in the US and Nippon Prologis and Mitsubishi Estate in Japan. Owning CapitaLand (Singapore) and Corio (Netherlands) detracted from performance.”
According to the latest factsheet, however, the fund has performed relatively in line with its FTSE EPRA/NAREIT Developed index Hedged to GBP, returning 39.43 per cent to the end of March over three years compared with the benchmark’s 42.54 per cent return.
Mr Ko, who has been a named manager on the fund since January 2012, adds that China and Hong Kong remain a risky market.
“When we look at those securities there is a valuation gap in them, trading 20-30 per cent discount against their real estate values. The Chinese government has been forceful in trying to dampen the housing market and that has increased volatility in the stock prices. Because of that, China and Hong Kong [real estate] securities have been a laggard among the global securities this year.”
While its five-year numbers place this fund in the second quartile, it has produced top-quartile returns in all other time periods. At £29.5m, it is among some of the smaller vehicles in the sector, but this should not discourage advisers from considering this as part of a client’s portfolio.
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities:
Generally I prefer actively managed funds but if you want exposure to global property securities, then you’re better off in a tracker. This is not just a criticism of managers Kay Herr and Jason Ko, more of the sector itself where most active funds have failed to beat the usual benchmark, the FTSE EPRA/NAREIT Developed index.
