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High Conviction Property Securities Fund

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

October 2022 - Monthly REPORT

Stable earnings despite rising cost of capital

SUMMARY

The AREIT sector was up 9.9% in October, outperforming the broader market by 3.9%.

The catalyst for the outperformance was the optimism that bond yields may have peaked with the RBA slowing down the rate hike to 25 basis points versus market consensus of 50 basis points.  As a result, 10 year bonds closed 13 basis points lower to 3.76%.

The Fund returned 9.7% driven by our positions in Arena REIT (ARF: +18%), Lifestyle Communities (LIC: +15%) and SCA Property Group (SCP: +15%).

We recently held a Portfolio and Investment Update webinar, along with Q&A for shareholders, which is available below for your review. CPD points are applicable for Australian Financial Planners HERE. 

PORTFOLIO

Top Holdings (alphabetically)

Charter Hall Group
Australia
Real Estate
Charter Hall Group invests in and develops real estate. The Company manages real estate investment funds and develops commercial, residential, and industrial properties.
Goodman Group
Australia
Real Estate
Goodman Group is an integrated industrial property group. The Group has operations in Australia, New Zealand, UK, Asia and Europe. Goodman's activities include property investment, funds management, property development and property services. The Group's property portfolio includes business parks, industrial estates, office parks and warehouse/distribution centers.
GPT Group
Australia
Real Estate
GPT Group is an active owner and manager of a diversified portfolio of Australian retail, office and industrial property assets. The Group's property portfolio include the MLC Centre, Australia Square, Rouse Hill Town Centre and Melbourne Central.
Lifestyle Communities
Australia
Real Estate
Lifestyle Communities Ltd Limited provides resort style housing for individuals in their fifties and older.
Shopping Centres Australasia Property Group
Australia
Real Estate
Shopping Centres Australasia Property Group is a real estate investment trust owning Woolworths Group anchored shopping centres and free standing retail assets.

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Oct 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund 9.7% -17.8% 1.8% 4.2%
S&P/ASX 300 A-REIT (AUD) TR Index 9.9% -13.9% 6.6% -2.0%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

Despite a continued rise in the cost of debt, the AREIT sector’s earnings profile remained resilient with forecast earnings guidance retained in the latest quarterly updates.  REITs such as DXS, SGP, MGR, VCX, CLW, CQE, GOZ and CIP all reiterated FY23 EPS guidance. This consistency in earnings can be attributed to the following;

  1. The majority of earnings are contractual rents with average lease terms of 4-5 years
  2. Average debt to asset ratios remain low at 27% with over 60% of debt hedged
  3. A strong operating environment with high occupancies of over 90% coupled with a recovery in sales for retail and strong rental growth for industrial assets.

This allowed AREITs to provide investors with a stable distribution yield of 5% and forecast earnings growth of 4%.

Another impact of rising interest rates is on valuations.  Currently, there is a large disparity between the pricing of assets in the direct market versus the listed market, with a majority of REITs trading at large discounts (20%) to their book value or NTA (net asset value).  We are forecasting that cap rates will rise but will be largely offset by rental growth, especially in logistics, convenience retail and alternative asset classes.

Looking at the liquidity or funding position of the sector, there are early signs that availability of capital is decreasing and funding margins are increasing. Credit spreads have increased by approximately 50 basis points from the COVID period but this should be viewed in the context of excess liquidity caused by central banks to support markets during COVID.  Looking at the credit spread over the longer term, it is still within a normalised level of 100-150 basis points above the base rate.

In terms of capital allocation to the sector, there has been a structural under weight to real estate in the Asia Pacific Region, with allocations of less than 8% versus a target weighting of 11%. When we combine this with the current discrepancy in pricing between direct and listed real estate, this could favour REITs to the extent that they offer relatively better value and levels of liquidity. Australia is viewed as the most stable economy in the region and is a likely candidate for increased allocations.

Combining all of the above factors, we continue to favour REITs that have strong balance sheets, high quality assets and a capital light business model supporting growth through acquisitions and development.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
17
MAXIMUM DRAW DOWN
-31.4%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 0.9783
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 14.67m
  • 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. Please refer to the PDS for information regarding risks. 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.