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Property funds feel the Resilient heat

Huge variance of returns as those with exposure to Resilient REITs see large drawdowns.

Over the past 10 years, listed property has outperformed all other local asset classes. As a result, property funds have dominated the unit trust performance tables.

For the decade between the start of 2008 and the end of 2017, 13 of the top 20 unit trusts in the country were property funds. The best of them delivered an annualised return over this period of 17.75%.

Read: SA’s top unit trusts over 10 years

So far this year, however, listed property has faced a much tougher ride. Concerns around the Resilient group of companies have seen shares in these REITs sell off aggressively, and that has had a significant impact on a number of unit trusts.

Read: Resilient group of REITs pummelled as short sellers raise bets

Over the year to date Resilient’s share price has fallen over 40%, Nepi Rockcastle is down close to 30%, Greenbay is off 13%, and Fortress B has shed over 50%. Funds exposed to these companies have suffered as a consequence.

In just the first two months of this year, the worst-performing property funds have dropped close to 30%. The table below shows the five funds that have seen the largest drawdowns so far in 2018.

SA real estate fund performance
Fund YTD return
Metope MET Property Fund A -28.47%
ABSA Property Equity Fund A -28.12%
ABSA Smart Alpha Property Fund A -24.89%
STANLIB Property Income Fund A -20.17%
Warwick BCI Property Fund A -18.37%

Source: Morningstar

The first thing to note is that the two funds that have come worst off were actually the two top-performing funds in this category last year. The Absa Property Equity Fund and Metope MET Property Fund both produced returns above 24% in 2017.

This performance placed them among the top 15 funds across all categories for the 12 months to the end of December. In just under nine weeks, however, they have both more than given up all of those gains.

What is significant is that this boom and bust have the same cause – these funds were highly exposed to the Resilient group of REITs. Last year, this was great for investors as Resilient was up around 35%, Greenbay soared 60%, and Fortress gained over 30%.

However, so far in 2018, exactly the opposite has been true. The below table shows their holdings at the end of December last year.

Property Fund Holdings at 31 December 2017
Resilient 11.86% 13.22%
Nepi Rockcastle 19.72% 13.27%
Greenbay 9.60% 7.72%
Fortress Income Fund 9.72% 10.24%

Source: Morningstar

In Metope’s case, these four REITs were the fund’s top four holdings, with a combined weighting of over 50%. ABSA was slightly less exposed at a combined total of 44.5%, but Nepi Rockcastle, Resilient and Fortress were its top three holdings.

Not all property funds have however been in this boat. As the table below shows, the top-performing real estate unit trusts so far this year have managed to deliver positive returns.

SA real estate fund performance
Fund YTD return
Marriott Property Income Fund A 3.24%
Nedgroup Investments Property Fund A 3.06%
Plexus Wealth BCI Flexible Property Income Fund A 1.14%

Source: Morningstar

This divergence of returns is enormous. Over just two months, the difference between the best and worst performing property funds is almost 32%.

It’s also worth noting that, in complete contrast to Metope and Absa’s offerings, the Marriott and Nedgroup funds were among the three worst-performing funds in this category 2017. It almost goes without that the reason is that they both carried zero exposure to any of the Resilient group REITs.

The longer term impact of Resilient’s difficulties is that the performance of property funds over the past three years now looks decidedly mediocre. The table below shows the top performers in this category over this period.

SA real estate fund performance
Fund 3 year annualised return
Sesfikile BCI Property Fund A 5.54%
Hollard Prime Property Fund B 4.98%
Marriott Property Income Fund A 4.48%
ABSA Property Equity Fund A 3.18%
Catalyst SA Property Equity Prescient Fund A 3.12%

Source: Morningstar

Over the same time frame the top-performing South African general equity fund has delivered an annualised return of over 10%. Even the leading bond funds have returned over 9% per year.

This period of weakness has therefore certainly taken some of the shine off the listed property sector. Managers will have some work to do to recover these losses, starting with ensuring some better diversification in their portfolios.



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Ah the joys of taking concentrated positions.
When it works your portfolio flies and you look a genius. When it doesn’t, allez-oopsie, welcome to the slaughterhouse.

Personal opinion, but I do find it both a bit lazy and irresponsible for active managers to gamble close to half their investors money on a single bet.
The Resilient family is basically a single bet, when all is said and done.
Diversify, diversify, even within a sector. Its not a crime.

Nice article, thank you.

The value destruction at the Resilient Group are self inflicted, similarly as the total destruction of Steinhoff International was a self-fulfilling sickness.

The question now begs whether the boards of Resilient, Fortress, Nepi Rock and Greenbay have what it takes to urgently self correct and to abandon their strategy of manipulation of ROE and round-tripping?

If not the market is close to the point of abandoning the shares of these companies as investors have already absorbed the huge losses. If the directors don’t move swiftly, the market will seek to recover it’s losses elsewhere and abandon these companies for good as is evident in the above data of property unit trusts.

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