22
Offshore exposure - SAPY
INVESTING
31 May 2017
120%
GRAPH 1: Breakdown of the South African Listed Property Index (SAPY)
LUBABALO KHENYANE, STANLIB
Multi-Manager: Portfolio Manager and
MALCOLM HOLMES, STANLIB Multi-
Manager: Head of Portfolio Management
100%
80%
60%
Portfolio construction
using listed property
I
nvestors wanting property in their
portfolios should be well diversifi ed
across various investment approaches
and philosophies to benefi t from the
asset class’s stable income and capital
growth. In our experience, to achieve
diversifi ed property exposure an investor
can look at SA property managers
through three diff erent lenses – those
focused on high income, on capital
growth or purely on global stocks.
Previously, investors in the South
African Listed Property Index (SAPY)
were exposed to only SA-focused
property companies but that dynamic
has been changing. From being an
almost 100% domestically-focused
market nearly 10 years ago, the listed
property sector in South Africa has
broadened and deepened to include far
greater off shore exposure (see graph 1).
Today, around 34% of the revenue
of the SAPY comes from outside
of South Africa. Th is number
also excludes the likes of Intu and
Hammerson, which are London based
and listed property companies with
secondary listings in South Africa.
Th is global dynamic has become an
important investment consideration
because of the currency eff ect.
Rand weakness benefi ts property
companies with off shore exposure,
whilst Rand strength and the associated
benefi ts of lower infl ation and interst
rates favours domestically focused
property companies. Understanding
each manager’s investment approach is
therefore fundamental to knowing how
to achieve an intended return.
Now lets turn to the question of how
much property exposure should be held
in a multi-asset portfolio?
For eff ective portfolio construction,
understanding investors’ goals is
important. Oft en, investors will set
investment target returns based on their
long-term goals of growing capital,
preserving capital or generating an
income. So an investor’s time horizon
and risk profi le is a key indicator of their
investment profi le as a conservative,
moderate or more aggressive investor.
Th e more aggressive the growth target,
the greater the allocation to growth assets
(equities, property, etc.) and off shore
exposure for diversifi cation.
A highly conservative investor
targeting a return of CPI plus 2%
per annum is typically 90% invested
in cash-like assets, with a small
allocation to growth assets such as
property and equities.
In constructing their portfolio an
investor can use a quantitative tool,
like the one highlighted in Graph
2, and complement this with a
qualitative assessment.
99%
96%
95%
40%
90%
89%
82%
74%
66%
20%
0%
2009
2010
2011
ZA & AF
2012
US
2013
EU
UK
2014
AU
2015
2016
Source: Avior Research
GRAPH 2: Portfolio construction based on real returns using quantitative tools
An overview of portfolio construction based on an investor’s real return goals
(i.e. returns above infl ation).
Source: STANLIB Multi-Manager
An investor targeting CPI plus
7% could have between 5% and 25%
invested in listed property to achieve
their goal over the long term. However,
the property market is relatively small
and faces some liquidity constraints –
when you consider qualitative elements,
the prudent allocation could be closer to
a maximum of 15%.
Property stocks are particularly
interest rate sensitive and tend to react to
economic changes. Locally, South Africa’s
recent credit rating downgrades have put
pressure on the asset class with interest
rates now less likely to decrease than
initially anticipated.
In the UK, a lack of clarity
surrounding the country’s exit “package”
from the European Union adds to
uncertainty there.
However, opportunities exist within
each market. A good manager will
conduct detailed research to identify
stocks that have natural market
dominance and are priced at valuations
that make them attractive. For investors
facing increased volatility both locally
and globally, suffi cient diversifi cation
across markets is the key to ensuring
consistent long-term returns.
The only investment outcome that matters
Outcome-based investing is a game changer for local
investors, according to Momentum Investments Chief
Investment Offi cer, Sonja Saunderson.
MMI Holdings has fully committed its policyholder
assets to outcome-based investing as its underlying
investment philosophy and the framework for
managing clients’ assets and their investor journey
through Momentum Investments.
“The true essence of outcome-based investing
means a complete overhaul of the way we understand
investor needs, make investment decisions, dialogue
with investors and do business. It makes the investor’s
goal the only benchmark that matters”,
says Saunderson.
She believes that investor behaviour is proven to
be driven by behavioral biases with a focus often
placed on short-term and peer investment returns, as
opposed to long-term drivers. The industry in turn is
product-driven as opposed to solution-driven and it
often leads to a vicious cycle of sub-optimal outcomes
for investors.
Momentum Investments follows outcome-based
investing as its philosophy. Given its role within MMI
Holdings it has a dedicated vision to be be client-
centric. Saunderson says: “We have re-organised our
investment capabilities to align to the optimal way
of constructing investment portfolios. This includes
having passive and smart beta, fi xed interest and
liability-driven investments as well as alternative asset
classes like private equity, property, commodities,
hedge funds and others. We need these diversifi ed
capabilities to focus on the investment outcome and
risk budget sought by the investor.”
There are broadly fi ve key steps to an
outcome-based investment programme:
• Understanding the client need or liability and
setting the desired outcome clearly
• Formulating an appropriate matching investment
strategy through an outcome-based construction
approach that will robustly deliver on the objectives
• Regularly asse ssing progress and whether the
plan is still appropriate to get to the outcome.
• Managing risks continually and appropriately
• Framing all communications to the investor
and assessing ongoing success in terms of the
desired outcome.
“We uniquely off er an ability to use multiple sets of
skills spanning diff erent types of traditional forms
of investment management depending on what
will lead to the best client outcome. Our process
tailors a solution using three diff erent tiers, namely
asset allocation, investment strategies and mandate
selection, and we can blend strategies to eliminate
downside experiences relevant to the investor,”
Saunderson adds.
“We blend in-house capabilities, which are especially
designed to deliver on key components of our
construction process like our cost-eff ective passive and
smart beta capabilities; and complement these with
other investment opportunities through smaller and
more agile investment companies, like ALUWANI and
RMI Investment Managers, for high returns.”
She says a key part of outcome-based investing is
placing a priority on selecting the right investment
opportunity fi rst and foremost.
“Diversifi cation is key to outcome-based delivery
and we therefore focus most of our energy on getting
the right allocation of opportunities together. When
we need to select a best-of-class provider for an
investment opportunity, the investment philosophy
and portfolio construction approach of the provider is
important to us.
“That matters far more in the long run, in terms
of properly matching the required strategy of the
portfolio they will be used in, than the portfolios past
returns or a brand name.
Saunderson emphasises that outcome-based
investing is not a cover for poor investment returns:
“The key for us is framing the adequacy of returns
solely in the context of the liability or required outcome
set at the beginning and not being distracted along
the journey.”