Patrick Sumner, head of property equities at Henderson Global Investors, talks to Will Jackson.
Q: In which asset classes will the Global Property Companies Trust invest?A: It will mainly be the ordinary shares of listed property companies, a minimum of 70%. Other shares will also be held, including infrastructure funds, PFI [Private Finance Initiative] funds, companies investing in asset-backed securities and debt securities. It is unlikely we will invest in the newer Eastern European markets. We tend to stick to the well-trodden paths. For instance, Singapore is more likely than Korea, because of liquidity considerations. Q: Why is now a good time to invest in property securities? A: The fundamentals of the property markets are in good shape. People tend to think that, because performance has been so good, we are at the top of the market. But office markets bottomed out in 2004 and 2005 and are still recovering, with strong rental growth. Retail rents tend to be less cyclical and have always gone up in the UK. They correlate with Gross Domestic Product, and GDP forecasts are good. On the investor demand side, we have seen a lot of yield compression, with investors willing to pay higher prices. It is a function of demographics, with the baby-boomers coming to retirement age and requiring income. The returns from property companies compare favourably with other investments. There are also opportunities with people wanting exposure to emerging economies. Another opportunity is house ownership in countries like Bulgaria, Romania, Turkey, China and India. There is a lot of pent-up demand from the middle classes. House ownership in Britain is at 65%, while in Turkey and Bulgaria it is in the low teens. On the diversification side, property shares have the benefit of low long-term correlation with general equity markets. They can be affected by market noise in the short term but they reflect property performance over a longer timeframe. As there is no single market in property, shares are the only way to get global diversification. Q: The fund will use your property equity process. How does this work? A: We have a regional team in Chicago and another in Singapore, covering Asia Pacific. The team advising us from Chicago is a local boutique called KG Redding, which consists of 18 people. Our process is top-down, combined with bottom-up analysis to determine which companies will take best advantage of the opportunities we identify. The regional teams carry out company visits. Property is not a transparent market and you have to get out there and find the opportunities. Q: Which other funds use this process? A: The Horizon Sicav range and the three funds we run for AMP Capital Investors. Q: Why did you decide to launch a closed-ended product? A: If you want to pull off a combination of good capital growth and income, you have to buy instruments that are less liquid. The advantage of captive funds is that you can take more liquidity risk. Q: Will there be stock overlap with the Horizon Global Property Equities Sicav? A: The trust will have many fewer stocks. Horizon holds about 100 stocks – 120 today [May 8]. The trust has just 57 in the model portfolio and we aim to keep this between 50 and 60. But there will be considerable stock overlap. Q: The placing and public offer for the trust closes late June. By when do you aim to have the cash invested? A: It should be invested immediately. We will invest around the world and there should be no liquidity issues. Q: The trust will be able to borrow up to 20% of assets in the short term. Do you expect to use this facility? A: We will tend to use borrowing for currency hedging, although we may also use it if we have a high degree of conviction about a stock. We will be happy borrowing on a three-monthly basis. We can fix the interest rate by keeping it short term. Q: Your model portfolio was significantly underweight North America and overweight continental Europe at April 25. Why? A: In the long run, most managers in the sector have a preference for Europe and Asia. North America and Australia have mature Reit [real estate investment trust] markets and there are fewer opportunities. There is also the spectre of rising interest rates in America. It is a significant risk and if Ben Bernanke [chairman of the Federal Reserve] does not know where interest rates are going, I certainly do not. We are overweight Australia, but this is because of higher yields. On the European side, we are overweight the UK across our funds. We have run the portfolio for about a month and, unless there is a dramatic market movement, I have no reason to change it right now. Q: The portfolio was also underweight residential. Are you pessimistic on the sector, or optimistic on commercial property? A: You do not buy residential property for the yields. A lot of residential developers are smaller or more illiquid than we are comfortable with. We feel we can get a lot of growth without going to smaller residential companies. Q: The fund has an absolute return benchmark of 8%. Why is it set at this level? A: This is because 8% seems to be the market level and is based on bond returns plus a risk premium. We think people will be quite happy above this level and very happy above 12%. There will be times when stocks go down but we intend to deliver a relatively resilient portfolio that can still make positive returns. Absolute benchmarks have become more popular among investors. People were happy to judge funds against indices but they do not like paying performance fees if they are losing money. We can not say that we will outperform the benchmark year-in, year-out. But, in the long run, property funds should be able to deliver. Q: The fund charges a performance fee. How will this work? A: The charge is 15% of performance above the 8% hurdle, with aggregate fees capped at 1.75% of net assets. There is a high watermark, so if we underperform, we will have to earn our way back out again. Q: At which types of investor are you aiming the fund? A: It will tend to go out through IFAs to private clients and there will not be many institutional investors. The yield of 4.5% should appeal to private clients, especially people willing to accept a bit more risk, balanced by diversification. People are attracted to property as a concept and we have had much interest from financial advisers for global listed property. There are not a lot of similar products out there at the moment. Patrick Sumner was appointed head of property equities at Henderson Global Investors in April 2004. He holds masters degrees in modern languages and business management from Oxford University and the London Business School respectively. He is a member of the Royal Institute of Chartered Surveyors and a founding executive board member of the European Public Real Estate Association, created in 1999.