PropertyJun 30 2014

Fund Review: SWIP Property Trust

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It invests primarily in direct property, which accounts for 75 per cent of net asset value (NAV). In order to provide the fund’s investors with a direct property return while maintaining an acceptable degree of liquidity, as well as holding cash, the fund invests in a range of alternative, property-related assets.”

The £2.9bn fund is the largest it has ever been and is also the biggest authorised property unit trust in the UK, according to the deputy manager. Ms Hunter maintains that the strategy is designed to deliver returns more closely correlated to property than cash.

“In terms of the direct property element, portfolio risk analysis is central to the investment process and the fund combines a bottom-up and top-down approach to deliver core plus style performance for its investors,” she adds. In the belief that consistent added value comes from the bottom-up strategy, much emphasis is placed on stock selection.

Ms Hunter describes the process behind the fund as dynamic and proactive, which explains why the portfolio underwent some changes in 2010. “Until 2010, the fund held only direct property and cash. As a result of the difficulties seen in the preceding two or three years by some of the open-ended funds, the managers reviewed the strategy and changed its prospectus to widen its investment arena, introducing alternative property-related assets,” she explains.

Macroeconomic factors also have some bearing on the positioning of the portfolio, with the top-down analysis having resulted in the fund being overweight to London and the South East in the past few years. The fund has an ongoing charge of 0.87 per cent.

Performance of the fund has lagged the IMA Property sector over three and five years, where it languishes in the fourth quartile. However, it has recovered in the past year to produce top-quartile returns. According to FE Analytics, the fund returned 14 per cent in the past 12 months to June 18, against a sector average of 6.38 per cent.

“Most of the fund is held in direct property and this is the largest factor in fund return. Income return has continued to be the primary contributor, outperforming the market average, over this period [year to end May 2014],” notes Ms Hunter.

The industrial sector has proved to be the “main driver” for the fund’s direct property performance, particularly the southeast industrial segment.

But Ms Hunter remarks: “As with the market overall, the fund’s retail sector has been weakest in terms of fund performance over the past 12 months. For example, our retail warehouse in Edinburgh and shopping centre in London were among the negative contributors. However, the fund has been working to reposition these assets and we expect to see the benefit of recent capital investment to feed through to performance in the near future.”

Since the start of 2013, the managers have undertaken 17 transactions as part of a strategy to increase its direct property weighting and to “reposition the fund by selling out of smaller, secondary assets and reinvesting the proceeds into better quality, larger assets”.

Ms Hunter says: “Most notable of the 11 acquisitions totalling £323m was King Edward Court in Windsor, which we bought for £105m. It provides the fund with a large, prime, defensive asset in an affluent southeast town to complement its other shopping centre holdings, which are more asset management and development focused.”

Ms Hunter expects total returns for 2014 to exceed last year, with central London offices “leading the way” in this recovery. “However, prime yields in the West End are now less than 4 per cent and the City is just marginally higher at 4.5 per cent. As a result, investors are looking further afield in order to achieve higher levels of income,” she suggests, highlighting the South Bank, Paddington and the fringes of central London as areas that are prospering, while cities such as Edinburgh and Aberdeen are also seeing positive returns.

Expert view

Rob Morgan, pension and investment analyst, Charles Stanley Direct

Verdict

Manager Gerry Ferguson takes a prudent approach aiming to minimise risk. He uses the fund’s large size to its advantage to produce a very diverse portfolio and sometimes to get involved in proprietary developments. The fund also has an interesting liquidity buffer of derivatives and property-related fixed income securities that means less cash is held compared to many of its peers, and potentially less drag on the portfolio when asset prices rise. I would not expect the integration into Aberdeen Asset Management to have affected the fund management process, so it remains a solid fund in the sector.