NZ Fund Managers

[Snoopy]

NZ listed property fund managers tend to run what I term an 'index +' portfolio, as I have describer in post 100. The reference index, in this instance consists of just eight investment entities. I have listed these in the table below. A fund manager who wishes to put their own sparkle on their portfolio must deviate from the index, even if by only a small amount. 'Investment sparkle' is just a term I have coined to describe whether an investment manager decides to take an underweight or overweight position from any entity in our 'class of eight'. Whether these 'breakaway investment decisions' are successful (or not) is, in the fullness of time, determined by the market.

In summary, the two factors that determine the effect of a market position 'away from the index norm' are:

a/ The size of the piece of the entity our fund manager wants to 'overweight' or 'underweight' -multiplied by-
b/ The percentage change in the unit price of that entity over our investment time-frame (in this case between 30-06-2022 and 30-06-2023).

The table below is meant to demonstrate how a deviation from the index template might have affected individual fund managers performance over the 30-06-2022 to 30-06-2023 year. The table starts with changes in constituent share price movements over the period.

	Share Price 30-06-2022 {A}	Share Price 30-06-2023 {B}	Percentage Change {{B}-{A}}/{A} or {C}	Relative Capitalisation 30-06-2023 (post 97)	Relative Capitalisation 30-06-2022 {D}	Weighted Percentage Change 30-06-2022 {C}x{D}	Normalised Weighted Percentage Change 30-06-2022 (3)
Precinct Properties	$1.37	$1.29	-5.84%	17.7%	18.1%	-1.057	-3.38
Stride Property Group	$1.66	$1.40	-15.7%	6.62%	7.56%	-1.186	-3.79
Property for Industry	$2.44	$2.365	-3.07%	10.3%	10.2%	-0.3131	-1.00
Kiwi Property Group	$0.975	$0.91	-6.66%	12.4%	12.8%	-0.8525	-2.72
Goodman Property Trust	$2.00	$2.22	+11.0%	26.9%	23.3%	+2.563	+8.19
Vital Healthcare Properties	$2.695	$2.34	-13.2%	13.4%	14.8%	-1.954	-6.24
Investore Property	$1.59	$1.40	-11.9%	4.51%	4.93%	-0.5868	-1.87
Argosy Property	$1.16	$1.115	-3.88%	8.17%	8.20%	-0.3182	-1.02
Total				100%	100%

Notes

1/ The above table does not account for cash issues during the year, nor dividend payouts.
2/ The stand out in the table above is the Goodman Property Trust, the only index constituent to make a capital gain during the year.
3/ Normalisation is based around the relative effect of holding Property for Industry (PFI). Changes away from the representative holding of PFI are the least impactful change you can make to a portfolio and so have been allocated the number '1' on the relative changes scale.
4/ Sample calculation for relative capitalisation for 30-06-2022, Precinct Properties:
Share price loss means the relative capitalisation for YE30-06-2023 has been reduced from its YE30-06-2023 level. What was the indicative relative portfolio position before the share price reduction?

P x (1 - 0.0584) =17.7% => P= 18.80%

If you do this exercise for all eight entities in the table, you will find the summed previous percentages, like the 18.8% I have calculated above, do not sum to 100. Let's say they sum to 10'x'%, where 'x' is a number greater than zero. That means you have to reduce the percentage figure 'P' calculated above by the fraction 100/10'x'. (Note that in this particular column-er example, the multiplication factor turns out to be 100/103.77, where 'x' is 3.77):

18.8% x 100/103.77 = 18.1%



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How does one use the table above? Choose a particular constituent company from any 'NZ property 'fund managers fund', expressing it in the form of a percentage of the fund total. Subtract that percentage from the same company figure in table column {D}. If the figure is positive, then this is the fund's overweight position in that share. If it is negative, then that represents the fund's underweight position.

The last two columns are there to show how the actual change in share prices during the period, affected overall portfolio composition, in relative terms.

SNOOPY

[Snoopy]

Bare numbers summarized over a difficult property year:

	30-06-2023 Year Return	add back Fees and Taxes	equals Underlying Return
ANZ Oneanswer NZ Property	-1.23%	-1.10%	-0.13%
Harbour Real Estate Fund	1.61%	-0.78%	2.39%
Smartshares NZ Property ETF	-1.31%	-0.54%	-0.77%

How did Harbour Asset Management top our little table? Rather than being particularly great at picking winners, it looks like Harbour were significantly underweight in three of the biggest losers, being 'Vital Healthcare Property', 'Stride Property Group' and 'Investore'.
1a/ For VHP: capital saved was 14.0%-12.8% = 1.2 percentage points, or 1.2/14.8= 8.1% of a hypothetical index invested total.
0.081 x 14.0% x a 13.2 capital value percentage loss = 0.15 percentage points of portfolio capital loss saved
1b/ For SPG: capital saved was 6.92%-5.42% = 1.5 percentage points, or 1.5/6.92= 22% of a hypothetical index invested total.
0.22 x 6.92% x a 15.7 capital value percentage loss = 0.24 percentage points of portfolio capital loss saved
1c/ For IPL: capital saved was 'at least'(*) 4.51%-2.72% = 1.79 percentage points or 1.79/4.51 = 40% of a hypothetical index invested total.
0.4 x 4.51% x an 11.9 capital value percentage loss = 0.21 percentage points of portfolio capital loss saved.

(*) The actual holding in Investore at the latest reference date is not disclosed. However we do know that it is a smaller position than the number 10 holding on the top ten list of investments.

Furthermore Harbour adjusted for the aforementioned 'underweightings' by overweight in one of the smallest losers - Argosy.


Was it the 'plus' bit of the 'index plus' strategy that helped?
2a/ Broadening the definition of 'real estate' to include 'retirement villages' certainly did not help. Ryman was down 26.1% for the year and Oceania was down 17.2%, although Summerset was basically steady (a loss of 0.1%).
2b/ Holding Infratil certainly helped with the head share up a massive 32% in the year under consideration. Albeit we have to remember Infratil made up a scant 2.72% of the Harbour Asset portfolio at years end for a gain of 2.72%-2.06%= 0.66 portfolio percentage points added to total return. (R x 1.32=2.72% => R= 2.06%).
2c/ Holding a stake the Australian listed 'Goodman Group' (a 3% holding at 30-06-2023) while its share price rose from $A17.84/0.9048=$NZ19.72 to $A20.07/0.9165=$NZ21.90, a rise of 11% was positive. This added 3.0%-.2.7%=0.3 percentage points to the overall portfolio total (R x 1.11 = 3.00% => R= 2.70%)

Adding up the savings of holding underweight positions in the biggest losers of the real estate investment index, coupled with the winnings from picking a couple of quasi property companies that sit out side the index, the total portfolio advantage to 'Harbour Asset Management' stretches out as follows:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)= 1.56%

However, the actual 'winning margin' for Harbour over the Smartshares NPF fund was: 2.39%--0.77% = 3.16%.. Why the difference?

SNOOPY

[Snoopy]

I have gone back into the Harbour archive, to see if we can learn a bit more about the Real Estate fund's out-performance.

The 30th June 2023 fund update is here:
https://www.harbourasset.co.nz/asset...tment-Fund.pdf

While the 30th June 2022 update is here:
https://www.harbourasset.co.nz/asset...-June-2022.pdf

For good measure, I have also added in the three reporting periods in between. It is always good to learn what you can from the pros. This table gives we plebs the best chance of understanding what Solly and his team at Harbour Asset Management were up to.

	Harbour Real Estate Top Ten holding fund percentage (30/06/2023)	Harbour Real Estate Top Ten holding fund percentage (31/03/2023)	Harbour Real Estate Top Ten holding fund percentage (31/12/2022)	Harbour Real Estate Top Ten holding fund percentage (30/09/2022)	Harbour Real Estate Top Ten holding fund percentage (30/06/2022)
Precinct Properties	12.61%	12.35%	12.22%	11.66%	11.94%
Stride Stapled Group	3.79%	3.53%	3.81%	4.46%	4.58%
Property for Industry	8.15%	8.13%	8.21%	8.22%	7.89%
Ryman Healthcare	2.94%
Summerset				2.65%	2.74%
Kiwi Property Group	10.04%	10.25%	10.56%	9.72%	9.98%
Goodman Property Trust	19.05%	18.95%	17.88%	16.14%	14.30%
Goodman Group (AUS)	3.00%	3.12%	3.58%	2.94%	3.29%
Vital Healthcare Property Trust	8.94%	9.02%	8.88%	9.61%	9.54%
Infratil	2.72%
Investore		2.89%	3.17%	3.32%	3.67%
Argosy Property	7.39%	7.35%	7.47%	7.53%	7.45%
NZ Rural Land Company		2.84%	2.56%
Total	78.63%	78.44%	78.34%	76.3%	75.38%

Notes

1/ The Harbour Real Estate Fund has a much broader definition of 'property investment' than is generally understood by the market. In particular:
1a/ Ryman healthcare and Summerset are New Zealand retirement village operators. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, retirement village operators are not property owning companies in the conventional sense.
1b/ Infratil is a global owner of global infrastructure assets. It is a reputable and well run company, but is not known as an owner of buildings, as such.
1c/ Goodman Group is a global property manager based out of Australia running a co-investment property ownership model (The Goodman Property Trust in New Zealand, GMT, is just one of these co-investment partners
1d/ NZ Rural Land Company is a farm owning entity, which rents out its land to farmers.
All five of these companies, despite their merits, are not really NZ property investments in any majorative sense.

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Discussions to come.

SNOOPY

[Snoopy]

Adding up the savings of holding underweight positions in the biggest losers of the real estate investment index, coupled with the winnings from picking a couple of quasi property companies that sit out side the index, the total portfolio advantage to 'Harbour Asset Management' stretches out as follows:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)= 1.56%

However, the actual 'winning margin' for Harbour over the Smartshares NPF fund was: 2.39%--0.77% = 3.16%.. Why the difference?

After creating post 103, I have a reassessment to make.

Shane Solly in April 2022 from a review article.
https://www.harbourasset.co.nz/resea...-real-returns/

"REIT investment universe is more diversified than was the case even five years ago with REITS now including investments in sectors such as logistics, healthcare and education which have structural tail winds."

One year on, how did the Harbour Real Estate Fund look in the shadow of this vision by Solly? The largest logistic company property managers in the portfolio are GMT (Harbour holding -1%ge point below index rating) and PFI (Harbour holding +1%ge point above index rating). That adds up to the fund having a neutral rating on logistics property. The only healthcare property company, Vital, is underweight by 1%ge point compared to the index rating. Furthermore, Harbour have not declared any real estate assets in the education sector, although with none listed in NZ, we can't blame Solly and his team for that.

Nevertheless it is extremely disappointing that Solly has not followed through on his vision and is leaving the 'property sectors with structural tail winds' to be exploited by others.

It looks like I owe Solly and his team at least a partial apology. Solly did indeed boost his fund's holding in the largest logistics player, GMT, after all in the ensuing year following his comment quoted above. GMT went from 14% to 19% of the portfolio in fact. What threw me was that at a 19% portfolio weighting (and without the benefit of portfolio accumulation hindsight that I now have), the GMT holding was barely up to index rating level, - possibly a bit below (before I had assumed was a constant state). So even though Solly's move to buy a lot more GMT was in hindsight 'a good strategy followed through', it looks like Mr Market got there ahead of him. He is a smart guy that 'Mr Market'!

Right, back to the 'Why the difference' discussion.

In my post 98, I considered that Harbour's holding in GMT was almost the same during the year under examination. But if Harbour had managed to increase the quantum of their GMT holding to 25% above the 30-06-2022 total at prices of around $2 per share (quite possible), then -indicatively- the Harbour portfolio gain over the 12 months would have increased by a an incremental further amount:

For GMT: 'extra capital acquired' was 19.05%-14.30% = 4.75 percentage points or 4.75/14.30 = 33% more than the assumed steady state investment total.
0.33 x 14.30% x an 11.0 (see post 101) capital value percentage gain = 0.52 percentage points of additional portfolio capital gained.

Other transient adjustments to the Harbour Asset Real Estate portfolio during the year under examination were less meaningful (refer post 103).
The already noticed under-weighting of Stride (post 98) looks like it was an active strategy during the year. So too the clinical sell down of the associated company Investore stake. I wonder what it is that Solly does not like about this duo?

Looking at the remainder of the 'big eight' (refer to post 98):
a/ Precinct Properties continues a slow march upwards towards index rating.
b/ Property for Industry maintains a slightly higher than index rating.
c/ Kiwi Property Group maintains a slightly higher than index rating.
d/ Vital Healthcare Property is held at a solid percentage point below where an index holding should be. This is interesting because Solly has identified the healthcare property sector as one with 'tailwinds'. Perhaps even with those tailwinds, Solly considers VHP relatively expensive?
e/ Argosy continues to be held at a level which is a solid two percentage point above where an 'index hugging manager' would sit.

That last overweight holding is interesting, because Argosy offers one of the highest dividend yields in our core of eight, with a gross dividend yield of 8.29%. This is effectively a full two percentage points higher than an index tracking portfolio, as derived in the link below:
https://www.sharetrader.co.nz/showth...=1#post1022016

So Harbour Asset Management through their 'real estate fund' gains extra income above the index gauge on their (10.56-8.56)/8.56 = 23% higher percentage point over-rating of ARG shares, multiplied by their contribution to portfolio income as follows:

0.23 x (8.29-6.33) x 12.2% = 0.05 incremental percentage point return.

Taking the gains over and above index holding identified in post 102, and adding the gains in this post we get:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)+(0.52+0.05)= 2.13%

O.K., we are still a percentage point or so behind the 3,16% achieved. But we are working with incomplete information. Sometimes fund managers do a bit of trading during the year (notice that some of the holdings in post 103 go up and down a bit during a 12 month holding period). It could be that Solly has 'topped up his profits' from trading around the edges of the shares his portfolio holds.

The numbers game gives the win to Solly (post 102). My detective work gives investors a good idea of how the winning strategy was played out (posts 102 and 104). So we have a result! Solly and his Harbour Asset Management Real Estate Fund is the place to put your real estate capital!

Or is there more to consider?

SNOOPY

[Snoopy]

The numbers game gives the win to Solly (post 102). My detective work gives investors a good idea of how the winning strategy was played out (posts 102 and 104). So we have a result! Solly and his Harbour Asset Management Real Estate Fund is the place to put your real estate capital!

Or is there more to consider?

There are a few more NZ Real Estate Funds out there. I don't disown the 'index plus' approach to setting up these real estate funds. But I did wonder if there is anyone else out there running an NZ Property Fund based on a different strategy. The main problem with the three protagonists that I have looked at in detail is that together they account for around 30% of the total listed NZ real estate market (around 10% each). When you are that big, it is difficult to deviate too far from 'index plus'. I wondered if there were any smaller operators out there, pursuing a different strategy?

I came across 'Mint Asset Management'
https://www.mintasset.co.nz/our-fund...property-fund/

Despite the name, the 'Australasian' property fund is heavily weighted towards NZ's 'big eight' listings (totalling 91.86% of the fund). But at just over $28m, it is less than one third the size of any of the other three protagonists examined so far. Yet if you click on the latest fund update and compare the fund composition with the NZ Real Estate index constituent rating (post 99), you will see that 'Mint Asset Management' is 'index plus' as well. For the record the Mint Management version of 'index plus' means a 2 percentage point underweight position in both KPG and VHP, with IPL also down 1.5 percentage points. PCT is up by a percentage point as is SPG. 'Rogue declarations' outside of the core eight are Charter Hall (real estate) and NEXTDC (data-centres) in Australia. The annual management fee at Mint was 0.98%

As an aside, Solly's previous employer was Mint. So you could say that in moving to Harbour Asset Management, this was for Solly merely an exercise in 'continuing to do everything he had been doing'. That means, the way I see things, it does come down to which of the 'index+' market players I see as best. Currently I hold none of the big eight underlying investments from which our respective fund managers make their lunch. So I feel I am in a position to judge the merit of the eight protagonists from a value perspective today without any 'anchor baggage'.

The most important thing to consider is how these property funds have positioned themselves for the future, not to get hung up on past success or under-performance. For that you need a vision of where DARP (Demand at a reasonable price) will come from.

My top preferred NZ property sector investments are:

1/ Property for Industry: Big box industrial and logistics (sectors I like) at a good yield from quality underlying earnings (a higher percentage of imputation credits earned than most). A good track record of 'sticking to their knitting'.
2/ Stride Property Group: Tarnished with their inability to sell down their office portfolio with the failed 'Fabric' float, Stride's long term aim is to be a 'management ticket clipper'. Others put up the equity to actually own the properties under management. It is such a profitable plan, that buying out profitable management contracts held by outsiders was lauded as the thing to do by many of the top eight market players over the last few years. Stride is not a full PIE which might put some property investors off. But for me tax matters are a consideration, not an over-ruling command for where I put my investment dollars.
3/ Argosy: Trying to cover all categories of property investing (office, industrial, large format retail). But the with tilt towards big box industrial (53% of the total portfolio) and some retail (9%) that attracts me. Leaving aside Kiwi Property, which has become more of a property developer and will likely reduce dividends soon to fund their 'live work and shop' at one site new development vision, Argosy gives investors the highest dividend yield.

Almost making my top 3 was Investore, as I like the recessionary proof big box grocery sector. Countdown (Inverstore's biggest tenant) does play 'hard ball' though, with their rent contracts. I got worried when Investore announces rental lease deals at rates below the cost of bank funding! I need to look into margins at Investore a bit further. Kiwi Property is a 'roll the dice' investment with lots of development and execution risk. Goodman Property Trust a great company in a good sector, but very fully valued. Ditto for Vital Healthcare. Precinct are the big player in office towers, which I see as a sector coming under pressure in the near term - with government departments set to shrink - and in the long term with greater acceptance of 'working from home.

And the fund winner is.......

SNOOPY

[Snoopy]

And the fund winner is.......

Listed Property Fund Manager Comparison	Fund Annual Fee	Property for Industry holding Increment	Stride Property Group holding Increment	Argosy Property holding Increment	Sum Total Percentage Point deviation from Index	Absolute Total Percentage Point deviation from Index
Free Float Index Holding for Top Eight (Reference)	Not Applicable	11.6% (base)	7.47% (base)	9.23% (base)	0.0pp	0.0pp
1/ ANZ Oneanswer (Incremental Holding to Reference)	1.10%	+3.7pp	+5.6pp	-7.2pp	+2.1pp	16.5pp
2/ Harbour Asset Management (Incremental Holding to Reference)	0.78%	+0.85pp	-1.5pp	+2.0pp	+1.5pp	4.5pp
3/ Smartshares (Incremental Holding to Reference)	0.54%	+1.4pp	+0.85pp	+1.1pp	+3.4pp	3.4pp

I have created the above table to get an inkling of where our three protagonists might be going with my three preferred unit holdings, rather than the return they gave their unit holders in the financial year just gone. This is all based around my 'future vision' in post 105. Readers may have their own future vision across the different property sectors that is different to mine. That in turn may make them look at a fund manager from their own different perspective (a perfectly legitimate thing to do) and so come up with a different 'best' manager. Nevertheless, my own judgement is what follows.

In the twelve months just gone under scrutiny, the 'best performance', was put in by Solly's Harbour Asset Management Team. This was helped by various 'one offs' like Solly's big push into logistics via GMT (which in actuality meant he just caught up to where the other fund market players were already) and a one off boost from a 32% capital appreciation (resulting in 0.66 percentage points being added over 12 months to the fund total return) from a minnow holding in Infratil. I sincerely doubt that either of these effects will be able to be repeated in the current financial year. Some say we might see a boost this year in the recovery of Harbour's Real Estate fund holdings in the three leading listed retirement villages. I think there could be a 2% total portfolio boost from such a sub sector recovery. But whether this will all occur over the 30-06-2023 to 30-06-2024 period alone is doubtful. Consequently I believe that after Solly's relatively favourable twelve months of portfolio management on behalf of investors, the current ensuing twelve months should see Solly's Harbour Asset Real Estate performance 'revert to the mean'.

My instinct in picking a winner is to go for ANZ Oneanswer, because they are the most overweight in the two property owning companies that fit into my own 'growth vision' going forwards. Interpreting from the table above, the largest potential gain will come from the 5.6 percentage point overweight holding above the 4.74% base index shareholding rate (this means that to start the year, the percentage of the portfolio in Stride is 5.6%+4.7% = a 10.3% of the ANZ Oneanswer Real Estate total portfolio stake. Nevertheless, this pumped up 10.3% stake is only 10.3% of a much larger 100% portfolio. And the 'incremental piece' is only 5.6% of a much larger 100% portfolio. Finally, any out-performance will rest on just what kind of capital gain (or otherwise) applies to that slender 5.6% of excess sized Stride stake. What I am saying here is that even with those out sized portfolio sizing decisions made by ANZ Oneanswer, a 20% advance in the share price of Stride (a quite extreme favourable performance) will only increase the value of the whole Oneanswer Real Estate fund by just over a single percentage point above fund index returns. This shows up our most independently thinking manager (ANZ Oneanswer) to still be hugging the real estate investment index remarkably closely. On a slightly different tack, I would be very interested to know why ANZ Onesaver are so negative on Argosy properties, while the other two protagonists are resoundingly positive. Don't get me wrong. If your own research says you should take a stand aside from the index, and minimise your exposure to Argosy (in this instance), then I am all for a fund manager doing just that. But I remain puzzled by ANZ Oneanswer's extremely negative views on a company with such a strong dividend yield and yet a perfectly acceptable lease rollover profile. I also have to bear in mind that the ANZ Oneanswer management charge the most of the three fund manager protagonists here for managing the portfolio of listed entities on the investor's behalf.

Finally we come to Smartshares, which, is touted as nothing more than a mimic for the NZ real estate listed index, Despite this, through a quirk of fund management policy ('the cap') , I find Smartshares overweight in all three of the property shares that I like best. This fund 'cap' prevents this fund holding more than 17.5% of its invested capital in any one listed share. That, as a result, I should find all three of my preferred investments overweight in what is ostensibly an index fund blows me away. The fact that this fund has the lowest management fees seals the deal . The Smartshares NZ Real estate fund (NPF) is my winner. Yet I still retain respect for the other two fund manager protagonists. When all managers play the 'index plus' share selection game you can almost be sure that it will be a 'photo finish' to decide the winner!

SNOOPY