Manager Research

We have reviewed the Nedgroup Investments Property Fund to test whether we have sufficient levels of comfort around the core components of the fund, including the business, process and team. Our Tier 1 rating to date was informed by our confidence in portfolio manager Ian Anderson’s experience and insight into the property market, his depth of research and access to property managers, and his ability to implement his valuation driven views with high conviction. This is one of the few funds in the market that has demonstrated any willingness to construct a benchmark agnostic portfolio.

Their philosophy attracts them to companies that are capable of growing their distributions in excess of the sector average and that trade at discounts to their NAV’s. Given the structure of the listed property market and their valuation focussed process, the portfolio tends to be quite concentrated in smaller, domestically oriented shares which have less institutional support. These companies also tend to have very little offshore exposure, in contrast to the larger (and more expensive) shares like Growthpoint and Redefine, resulting in a strong link to the strength of “SA Inc”. This part of the market has been hit especially hard by the weakness in our economy, and this shows in the fund’s performance over the last 18 months.

While the problems within the property sector are now widely known, in prior years the consensus view across the property fund managers was one of overwhelming positivity, and one which we found difficult to understand given the high levels of relative valuation seen in counters.  It is now more clear to us that by and large the property sector did not fully comprehend both the increasing risk of balance sheets, nor the degree to which the SA economy could impact the sector as a whole.

This dynamic has exposed the research process underpinning the Nedgroup Property fund, where a mixture of complacency and a focus on identifying reliable income streams meant they focussed less on items such as balance sheet risk.

We have tested this extensively with the manager (Bridge) and have concluded that while the opportunity to protect clients from poor property fundamentals was largely missed (recall they held zero in Resilient which was a positive decision), the process in itself remains sensible.  Given the higher levels of diversity in the property sector going forward, we do expect fund managers as a general rule to gear up their property research, and while Bridge has an adequate team of three covering the sector, we believe they have some work to do in closing the research gaps.

We have therefore decided to downgrade the fund to Tier 2.   This is a frustrating outcome for our research process as we identified a number of these issues over the preceding years, but did not see a conclusive reason to change our view on any of the property funds as a result.  We will be monitoring the sector closely as the risk levels currently remain high, and it is very opaque in terms of what is priced in and how much ‘housecleaning’ of balance sheets may still lead to pain.