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Investing in a property fund

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(Shutterstock)

A Fin24 user wants to know what to do about her investment in a property fund which is not performing well. She writes:

I have an investment in a Stanlib property income fund. It has done well, but for the past two months it has gone down. Why?

Do I move to another fund? My fund manager says stay put as it is a long-term investment. Please advise.

Keillen Ndlovu, head of listed property at Stanlib, responds:

The fund’s price went down 21% from the May 20 to August 22. It has since recovered about 9% from the August 22 to September 12.

Why? What happened? What caused this?

There are a number of factors that caused this. The rand weakened against the dollar and we saw global bond yields move up across the world.

Higher bond yields generally mean higher interest rates or funding rates, and therefore lower property prices. A weaker rand generally translates to higher inflation. Higher inflation tends to lead to higher interest rates.

So when interest rates or bond yields are higher, listed property cannot stay at the same level. Investors look at the opportunity cost.

For example in May 2013, at the peak of the market, listed property was offering a forward yield of about 6%, which was almost similar to 10-year bond yields.

But bond yields moved up from the 6% levels to around 8.3% (that is, capital values fell) as a result of foreigners selling our bonds and a weaker rand.

So when bond yields are now offering 8.3%, it becomes difficult to justify why listed property should stay at 6% yield.

As a result, we saw property yields going up (prices coming down - when prices are down, it means the income as a percentage of price is now higher).

Such trends happen now and again. Our fund dropped 26% between May and July 2006 (with higher inflation and a rising interest rate cycle) and then recovered 74% until November 2008.

It then fell 37% from November 2008 to July 2009 (global financial crisis). From July 2009 to May 2013 the fund rose 162%.

It then fell 21% until August 22 2013 (global bond yields moving up after the US Fed announcing that are looking to pump less money into the US economy, but only if the fundamentals start to look better).

This caused an investor shift in interest to the US markets and away from emerging markets such as South Africa. Since August 22 the fund has gone up about 9% (to September 12 2013).

What we are highlighting is that despite the good returns that listed property has delivered, the prices do not move up in a straight line.

The price goes up and down in the short term. We have seen the listed property market come back after dramatic falls.

Why though? The property fundamentals were in place and our listed property companies continued to deliver positive income growth in line or better than analysts’ expectations.

Move to another fund?

It depends on your risk profile, objective and investment horizon. Our primary aim is to generate a regular source of income (paid out quarterly) for our investors.

Capital growth comes over time. We are fairly comfortable with our income growth outlook. Our year forward yield (income) is just over 7%. This is better than the interest that you can earn from cash.

We forecast income to grow by 6% to 7% over the next two to three years. This income growth is in line or better than inflation forecasts.

On a different note, it is important to have a diversified portfolio, depending on your risk profile. That includes a mix of these asset classes: equities, bonds, cash and listed property and also some offshore exposure with similar asset classes.

Fund manager says stay put as it is a long-term investment

Listed property is a long-term investment. The investment horizon should be three to five years or longer.

The income element is fairly steady, relatively easier to predict and growing. The capital part of the fund is volatile, more so in the short term.

Capital grows over time and is mainly driven by income growth. There is a place for listed property in a balanced portfolio.

Listed property behaves differently from equities. It has helped to provide better returns, lower volatility and therefore better risk-adjusted returns, more so in the long term - three, five, 10 and 15 years.

This graph shows the Stanlib Property Income Fund's unit price movement over the last five years:



- Fin24

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