If you're invested in a major property unit trust, it's likely that your returns over the past 12 months have been similar to the performance of the JSE's property index. This is not a coincidence: the portfolios of several property unit trusts bear a striking resemblance to the index.
For example, Growthpoint (JSE:GRT), the largest weighted stock in the property index, is also the biggest holding of seven out of eight major funds analysed by Moneyweb. Other stocks that are heavily weighted in the index have similar prominence in the unit trust portfolios.
Those who hold such unit trusts might ask why they are paying their fund managers fees (ostensibly for research, active stock picking and - hopefully - outperformance) when all they appear to be doing is loosely replicating an index.
Moneyweb examined the quarter-end portfolios of eight of SA's major property unit trusts. These were: Investec's Property Equity Fund, RMB's Property Fund, Catalyst's SA Property Equity Fund, Stanlib's Property Income Fund, Old Mutual's SA Quoted Property Fund, Sanlam's Property Fund, Coronation's Property Equity Fund and Metropolitan's Property Income Portfolio.
Two of the funds surveyed, those of Old Mutual and Catalyst, each had more than 75% of their portfolios identical to the property index. This means that if the portfolios remain as they stand, less than a quarter of the funds' performance would be the result of the skill or good fortune of the asset managers. The vast majority of the funds' performance would be explained by the property index.
The portfolios of five funds, those of RMB, Investec, Sanlam, Metropolitan and Stanlib were each more than 60% identical to the index.
Coronation's fund had the least overlap with 44%. It is also the only fund that doesn't count Growthpoint as its biggest holding. But Coronation's daring to be different may have been the cause of its underperformance over the past year.
Over the past year, four of the eight funds managed to beat the property index, according to data available at http://www.equinox.co.za/. And that was by a margin not greater than 2,2 percentage points.
A copy of a spreadsheet showing how the abovementioned figures were derived can be downloaded by clicking here.
Imagine your property fund manager had identified Octodec, Madison, CBS or Hospitality B units as undervalued 12 months ago, and invested a significant portion of the fund's assets into just one of these stocks. Each beat the property index by more than 20 percentage points over the past year. Madison (JSE:MDN) returned 102%, Hospitality B (JSE:HPB) 89%, Octodec (JSE:OCT) 78% and CBS (JSE:CBS) 67%.
Sadly, not one of these gems was to be found in the top five holdings of any of the managers profiled during the course of the past year. This is despite the presence of entire investment teams dedicated exclusively to painstaking research into property stocks, of which there aren't many.
It's a strong conviction in one's beliefs and the nerve to stray from the index that is thought to be the cause of superior investment performance over extended periods of time. For example, Allan Gray, an asset manager with more than three decades' history of market-beating returns, takes big bets on stocks it believes are undervalued, often giving those stocks the highest weighting allowed by unit trust rules.
To give an indication of just how similar property unit trusts are to the index, consider, for example, Cannon's Core Companies Fund. It invests only in companies contained in the JSE's Top 40 Index. But the percentage of the fund that is identical to the same index is just 43%.
This number drops to 29% for Cannon's Equity Fund, which is not restricted to the Top 40 index and may invest in any JSE-listed stock.
Cannon claims to have a decade's history of superior performance to the market.
Fund managers have given Moneyweb a number of reasons why their unit trusts are so similar to the index. For one thing, it is not always easy to buy and sell large quantities of property stock quickly and at the right price. Often, the stock simply isn't available. The larger stocks, such as Growthpoint tend to be easier to trade. Thus it might be physically impossible for a fund manager to take a big bet on a smaller stock such as Bonatla (JSE:BNT), which returned a whopping 3 900% over the past year.
But that is cold comfort for investors, who might argue that they are paying their fund managers to beat the index, not to take on board as much money as possible, which would generate extra fee income for the manager, but also makes the fund cumbersome.
There is another, darker, possible reason for fund managers' close imitation of the property index. They may be fearful that if they deviate too far from the index, it will beat them by too wide a margin. Better to have mediocre performance than to risk all for great returns.
Property investors could well be paying close attention to Proptrax, a soon-to-be listed exchange-traded fund (ETF) that will track the JSE's property index. Especially when there is often little to differentiate Proptrax from most "actively managed" unit trusts.
Proptrax's costs are significantly lower than those of managed funds. Clients can expect to pay a maximum fee of 75 basis points a year, which is deducted from quarterly distributions. This is about half of what active managers charge.
Like all the funds surveyed, Proptrax is a collective investment scheme, and is hence subject to a large amount of regulation designed to protect the investor. But unlike other unit trusts it also has the added transparency and security that comes with a JSE listing.
Perhaps the launch of Proptrax will cause some of the index-hugging portfolio managers to re-think their strategies, and dare to stray from the flock.
