Explaining the sell-off in the Property market

Explaining the sell-off in the Property market

The sell-off in the market was a stock specific event

Following a stronger than expected finish to 2017, the property market gave up all, and more, of its gains in the first quarter of 2018.
Although very disappointing, this was certainly not due to weak property fundamentals. Early in the year, allegations began to surface
around accounting irregularities and share price manipulation within the Resilient group of companies. Collectively, the grouping – Resilient,
Fortress, NEPI Rockcastle and Greenbay – made up 42% of the property index in December 2017. Shares in the group lost more than 60%
on average and by the end of the quarter, their weight had dropped to 24.8%. Other hybrid large caps such as Growthpoint and Redefine,
were beneficiaries of the accounting scandal while small cap property shares received a boost from the 0.25% cut in local interest rates.
While the property market lost 19.6% in the first quarter, it is important to understand that this was, and is, a very stock specific event.Year-to-date, the market has lost 21.4%.

It could be argued that the sector was overvalued to start and certainly that in hindsight, the Resilient group was particularly overvalued at premiums to their net asset values of between 60% and 70%. However, the property market is no stranger to large price shocks – in
between December 2007 and June 2008, the property market fell 31.9%. Prices quickly recovered and property gained 33.5% in the subsequent four months. The Resilient group experienced better performance in the second quarter of this year.

The STANLIB Multi-Manager Fund performed better than the market

The Fund comfortably outperformed the property market in the first half of 2018, although this is of little consolation as the fall was painful. Our job is to research asset managers in South Africa and abroad. In constructing our portfolios, we carefully select managers from our buy-rated list. Relative performance amongst the underlying asset managers in the Fund was directly proportional to the exposure they had to the Resilient group. Bridge in particular, produced the highest outperformance. Catalyst also had good returns, but STANLIB lagged somewhat. It was therefore comforting that the Fund lost less than the market, as measured by the SAPY index.

Looking forward

It is true that the property market is well diversified between shares with diversified geographic exposures (hybrids), SA-focused, European focused and UK-focused property companies. Each segment has its own drivers and while the direction of the rand will certainly have an
impact, it appears that the property sector is currently in the grip of a very stock specific event. We expect this to lead to better corporate governance and subsequent announcements by Resilient point to this. UK-focused property companies could certainly benefit from a
more positive Brexit outcome and European-focused companies, dominated by the Resilient group, are currently far less expensive than in 2017 and will do well if the allegations are proved untrue. We believe the combination of underlying managers in the Fund will be able to navigate these difficult times. The Fund remains remain fully invested and ready to make changes to the manager line-up in the best interest of all investors, should the need arise.



STANLIB Multi-Manager Property Fund

STANLIB Multi-Manager Property Fund

Keeps you updated with business news and rationale behind changes to STANLIB Multi-Manager solutions.

Benchmark change

STANLIB Multi-Manager constructs well-diversified portfolios, managed by appropriately selected underlying portfolio managers who
seek to outperform selected benchmarks.

The STANLIB Multi-Manager Property Fund has been benchmarked against FTSE/JSE SA Listed Property Index (SAPY). This benchmark
has some shortcomings:

  • It is highly concentrated – the top ten shares have a combined weight of 83% of the index
  • It only includes shares with a primary listing on the Johannesburg Stock Exchange (JSE)
  • The number of its constituents is limited to 20 shares

It follows that the SAPY index no longer accurately represents the South African property market and is no longer an appropriate
benchmark by which to measure fund performance.

STANLIB Multi-Manager acknowledged these flaws when the SAPY was selected as the benchmark for the property fund. At the time
however, there were no other viable alternatives. In October 2017, the JSE launched three new property indices:

  • All Property Index (ALPI)
  • South African REIT Index (SA REIT), and
  • Tradable Property Index

Amongst these indices the ALPI, attempts to overcome most of the shortcomings of the SAPY:

  • It is more diversified – the top ten shares have a combined weight of 71%
  • It does not have the primary listing requirements, introducing dual-listed offshore companies
  • Individual constituent exposure is capped at 15%
  • There is no limit on the number of constituents – as at 4 June 2018, there were 33 shares

Considering that there is no maximum weight limit at an individual share level for the SAPY, the index has a higher company-specific
(idiosyncratic) risk. This leads to higher concentration risk, resulting in investors becoming highly dependent on the performance of a
single share.

The ALPI presents a broader investment universe which will facilitate a more fair comparison. In contrast to the SAPY, the ALPI has higher
direct and see-through offshore exposure.

STANLIB Multi-Manager regards this index as a more appropriate benchmark for the STANLIB Multi-Manager Property Fund and
therefore changed the benchmark from the SAPY to the ALPI, effective 1 July 2018.



STANLIB Multi-Manager Property Fund – appointment of Sesfikile Capital

STANLIB Multi-Manager Property Fund – appointment of Sesfikile Capital

Keeps you updated with business news and rationale behind changes to STANLIB Multi-Manager solutions.

Overview

The STANLIB Multi-Manager Property Fund is an active, fully-invested property fund that aims to outperform the FTSE/JSE Listed Property Index (SAPY) and the ASISA Real Estate – General category average. The fund aims to provide investors with high income and long-term capital growth by investing in listed property shares. In order to achieve this, it adopts a multi-managed approach to investing, blending experienced property managers with differing investment philosophies and strategies.

STANLIB Multi-Manager continuously reviews the composition of the fund to ensure that it remains positioned to deliver on its objectives. In the most recent review, we decided to appoint Sesfikile Capital as an additional asset manager. This decision was taken to reduce single asset manager concentration in both Catalyst Fund Managers and STANLIB Asset Management, which combined , made up 75% of the overall fund.

Performance to 28 February 2018
Manager 1 Month 3 Months 6 Months 1 year 3 years 4 years 5 years 8 years 10 years
STANLIB Multi-Manager Property Fund B3 -8.2% -12.8% -9.0% -5.6% 2.3% 11.9% 9.6% 14.9% 14.4%
FTSE/JSE Listed Property Index (SAPY) -9.9% -15.4% -11.0% -6.1% 0.7% 10.2% 8.0% 13.9% 13.3%
Active return 1.7% 2.6% 2.0% 0.5% 1.6% 1.7% 1.6% 1.0% 1.1%
STANLIB Multi-Manager Property Fund B1 -8.3% -13.1% -9.5% -6.7% 1.2% 10.6% 8.3% 13.5% 13.0%
ASISA Real Estate General Category Average -7.6% -12.9% -9.0% -4.9% 1.2% 10.2% 8.4% 13.0% 2.3%
Active return -0.7% -0.2% -0.5% -1.8% 0.0% 0.4% 0.0% 0.5% 0.8%

Over the past 10 years, the fund has achieved its objective of outperforming both its index and peer benchmarks over the long-term. This outperformance can be attributed to the fund’s exposure to a blend of underlying South African property asset managers which STANLIB Multi- Manager rates highly. This is a trend we intend to maintain.

Key reasons for the inclusion of Sesfikile

Prior to the inclusion of Sesfikile, the fund had a 75% allocation to two core asset managers, namely Catalyst Fund Managers and STANLIB Asset Management. The remaining 25% was invested in Bridge Fund Managers and STANLIB Passive. Whilst we believe the high weight to core strategies was warranted, we were concerned about the single asset manager risk it introduced. As a multi-manager, our aim is to build funds that are highly diversified – across asset managers, investment philosophies and investment teams. This ensures no single asset manager dominates the performance of our funds. The introduction of Sesfikile Capital, a highly rated asset manager, helps reduce the concentration risk in the fund while maintaining our relatively high exposure to core strategies. In addition, Sesfikile provides diversification benefits and a differentiated source of alpha.

About Sesfikile Capital

Sesfikile Capital is a small, nimble asset manager that was established in 2010 by Evan Jankelowitz, Mohamed Kalla and Kundayi Munzara with the help of a private equity company, Ukukhula Sibanye En Commandite Partnership.

The three founding partners – Evan Jankelowitz, Mohamed Kalla and Kundayi Munzara – are all shareholders and portfolio managers in the business. This means their interests and ours, as a client, are aligned.

The company has a sound investment philosophy focusing on:

    • Understanding the macro environment
    • Interrogating company specific aspects
    • Delving into financial detail; and
    • Looking for off-market transactions

Sesfikile’s philosophy is consistently applied by a team of seasoned investment professionals, with extensive experience in managing property assets in South Africa and abroad.

Changes in asset manager weights
Asset manager Previous weight New weight Change
Catalyst Fund Managers 40.0% 30.0% -10.0%
STANLIB Asset Management 35.0% 30.0% -5.0%
Sesfikile Capital - 20.0% +20.0%
STANLIB Passive (PCAP) 15.0% 10.0% -5.0%
Bridge Fund Managers 10.0% 10.0% -
Total fund 100.0% 100.0% -
Conclusion

The STANLIB Multi-Manager Property Fund has produced strong returns relative to its objectives, which can be attributed to the underlying asset managers. Catalyst Fund Managers and STANLIB Asset Management have delivered on expectations and we remain convinced that they will continue to do so. The introduction of Sesfikile Capital, a small, nimble asset manager, reduces any potential single asset manager concentration concerns and introduces differentiated alpha sources.

We believe the current composition of the fund is optimal, providing a greater chance of delivering on our client promise of outperforming the index while being peer competitive.


Jennifer Henry
Head of Portfolio Management: Retail Clients
BCom(Hons), CFA, FRM
E jennifer.henry@stanlib.com


Vuyo Mkhathazo
Portfolio Manager
CA(SA)
E vuyo.mkhathazo@stanlib.com