THE average small investor looking to invest in the South African listed property sector is receiving distorted information from the FTSE/JSE South African Listed Property Index (SAPY), say listed property commentators.
Inherent errors in the methodology used to construct the index are artificially inflating dividend yields for listed property companies and funds, they say. This can make investment in these companies and funds look more attractive than it really is.
In a separate matter, the JSE is also not recognising distributions from listed property unit trusts. Consequently, the market pages of newspapers show property unit trusts as having a 0% dividend yield.
This could potentially put off smaller investors from investing in property unit trusts even though they are in reality delivering solid distributions to unitholders.
Institutional investors are aware of the problems, so they affect mainly the private investor.
Evan Robins, property analyst at Nedcor Securities, says the FTSE/JSE SAPY index can provide misleading information to would-be investors. The reasons include actual calculation errors and methodological issues.
Robins says these issues were revealed by research done by his colleague, quantitative strategist Nerina Visser.
Robins says Nedcor Securities, fund managers and analysts have informed the FTSE/JSE of these calculation errors. But even when the errors were corrected, the index history was not changed.
“If you go back, you get incorrect information, and past errors continue to distort the total return benchmark,” he says.
Robins says the methodology used by the FTSE/JSE also distorts the dividend yields of listed property companies.
“At the end of December, the index dividend yield was 65 basis points higher than it really was. At the beginning of June there was still an error of 20 basis points, although this was recently corrected. It made it look like yields were 20 basis points higher than they really were,” he says.
Robins says all the corporate action taking place in the listed property sector is making the methodological errors more common.
For example, when listed property loan stock company Growthpoint Properties paid a special four-month distribution to align its distribution payments with listed property loan stock company Paramount Properties, which it had taken over, the four months’ distribution was added to Growthpoint’s normal 12-month distributions. This resulted in 16 months’ distributions being included in the index instead of 12 months’.
He says that if any investor looked at the historical yield of the index it would be misleading and not give a true reflection.
Robins says the total return index of the FTSE/JSE SAPY index is overstated, making it impossible for fund managers investing in the listed property sector to “outperform the index”.
“Anyone using the historical data will get false results because it makes property industry distribution growth rates at the end of December 15% higher than they really were.”
Robins says the JSE needs to review its methodology to make the index more financially meaningful, as well as make the underlying data more easily accessible to prevent errors.
“It’s not transparent, what the FTSE/JSE is using to calculate dividends for each company,” he says.
Meanwhile, the introduction of a new IT system in December at the JSE has led to a change in the definition of a dividend yield, says Robins.
Now, instead of viewing a property unit trust’s distributions as a dividend, the JSE views it as an interest payment. Consequently, listed property unit trusts in the sector have 0% dividend yields according to the JSE information contained in the market pages of newspapers. Robins said this was also misleading for the man in the street.
Ian Anderson, director of independent consulting company Re-connect Research and Advisory Services, says that given the fact that most specialist listed property mandates are benchmarked against the FTSE/JSE SAPY index and performance-based fees are calculated based on the portfolio’s out-performance of that index, any miscalculation of that index could prove costly to either the fund manager or the client.
“Right now the fund manager is being prejudiced as the performance of the index is being overstated, but who’s to say the client won’t be prejudiced at another time?” says Anderson.
He says a separate issue which is also causing frustration among fund managers is the fact that the FTSE/JSE SAPY index has undergone regular changes during the quarterly review process. This is due in large part to the number of corporate transactions that are common to the listed property sector and which have become even more frequent of late.
“This has seen a number of stocks exiting and entering the index after each review. One solution would be to include all property unit trusts and property loan stock companies in the index, rather than restrict it to 20 companies, as is the case now. It would only mean adding a handful of companies and funds .”
