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High Conviction Property Securities Fund

Australia's only high conviction A-REIT fund with an ESG focus

March 2022 - Monthly REPORT

Portfolio positioning to leverage rising inflation rates

SUMMARY

The Fund returned 2.33% during the month, outperforming the benchmark which returned 1.44%.  Our overweight exposure to Irongate Group (IAP), which is being acquired by Charter Hall Group (CHC) in partnership with Dutch pension fund PGGM, as well as the residential developer Peet Limited (PPC), have added most to outperformance.

PORTFOLIO

Top Holdings (alphabetically)

Centuria Capital
Australia
Real Estate
Charter Hall Group
Australia
Real Estate
Goodman Group
Australia
Real Estate
GPT Group
Australia
Real Estate
Mirvac Group Property Trust
Australia
Real Estate

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Mar 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund 2.3% 19.3% 26.3% 15.2%
S&P/ASX 300 A-REIT (AUD) TR Index 1.4% 19.2% 31.6% 5.7%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The assumption that higher inflation and rising interest rates are always negative for the property sector is incorrect. Below we share some insights on how we position the portfolio to leverage off inflation and protect the portfolio from rising interest rates, because as an actively managed fund, we can structure our portfolio to avoid most vulnerable companies and specifically target the sectors most likely to benefit in the current environment.

Starting with inflation, REITs generally provide a good hedge to inflation as most leases have CPI-linked components. In general, retail REITs tend to outperform other REIT sub-sectors in a high inflation environment as lease structures offer above-inflation fixed annual reviews of typically 4-5% p.a., and retail sales (in nominal terms) often benefit from higher inflation. Taking into consideration the impact of COVID-19 on the retail sector over the past two years, our preference is for convenience retail such as SCA Property Group (SCP). This provides us with defensive characteristics along with upside through CPI-linked and turnover rental structure. For instance, SCA has over 30% of its supermarket tenants on turnover rents. Other initiatives providing further upside to convenient retail groups such as SCA are through supermarket tenants expanding their space for fulfilment of their online sales. For example, Woolworths recently reported that above 80% of the company’s online orders were fulfilled from its in-store network, and these sales are being captured as part of their overall Moving Annual Turnover (MAT) for the centre.

In terms of higher input costs, we prefer developers that have strong pricing power and can pass on higher input costs to maintain margins. Amongst the residential developers, our preference is in affordable products including Manufactured Homes Estates such as Ingenia Group (INA) and land subdivisions such as Peet Limited (PPC).
Rising interest rates impact on both the valuation and cost of debt. 10-year bond rates are often used as the risk-free rate to price long dated assets. We conservatively apply a risk-free rate of 3.5% compared to the market of 2.5% which provides us with a buffer in the event of further rate rises and we seek exposure to the logistics sector as we anticipate further cap rate compression driven by capital demand and income growth in the short to medium term.

On the operational side, a rise in cash rates would impact on the cost of debt. However, it depends on the gearing level and hedging profile of each REIT. Even though the level of gearing of the sector is relatively low at 28%, the amount of unhedged debt has increased from 20% in FY19 to 35% currently. One of our key valuation factors is balance sheet strength. We not only assess the level of gearing at an LVR basis, but also take ICR (interest cover ratio) into consideration which assesses a company’s ability to pay back debt based on free cash flow. As a rule of thumb, we will not invest in a REIT with ICR of less than 2x.

Another way that we protect the portfolio is to invest in alternative assets such as data centres, childcare centres, medical centres and retirement living. These assets are generally driven by secular trends and are less cyclical compared to traditional assets such as office, retail and industrials. Our weighting to the alternative sector is currently 25% compared to the S&P/ASX 300 A-REIT Index of 6%.

In times of volatility and potential headwinds caused by rising interest rates and inflation, it is important to have an active portfolio that is positioned for capital preservation whilst capturing potential growth.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
16
MAXIMUM DRAW DOWN
-15.8%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.2813
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 12.81m
  • STRATEGY INCEPTION DATE 11 March 2020
  • BenchmarkS&P/ASX 300 A-REIT Total Return Index

Fund Managers

Amy Pham

Portfolio Manager

Jade Ong

Investment Specialist

Description

A Property Fund focussed on capital security, income yield, and sustainable growth.

The Fund believes each security has an underlying or intrinsic value and that securities become mispriced at times relative to their value and each other.

The Fund seeks to exploit such market inefficiencies by employing an active, value based investment style to capture the underlying cashflows generated from real estate assets and/or real estate businesses.

The Fund believes that responsible investing is important to generate long term sustainable returns. Incorporating ESG factors along-side financial measures provides a complete view of the risk/return characteristics of our property investments.

The Fund is benchmark unaware. All positions are high conviction and assessed on a risk-reward basis, resulting in a concentrated portfolio of 10-20 securities.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The Fund incepted on March 11th 2020.  Index performance calculations include a complete month’s performance for March 2020.  No allowance has been made for buy/sell spreads. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 11 March 2020.
3. Annualised standard deviation since inception.
4. Relative to S&P/ASX 300 A-REIT TotalReturn Index.
* For further information regarding fees please see the PDS available on our website.