We kicked off our 2019 External Distribution Channels (EDC) team lunches with the Absa Property Franchise. As a team, we host monthly client lunches in Johannesburg, Pretoria, and Cape Town to showcase the ABSA Asset Management products and offering and also to create an environment where clients and are able to have meaningful interactions with our portfolio managers and investment professionals.
Fayyaz Mottiar, Head of the Property franchise is well known for his high conviction and also his ability to tell it as he sees it. Arshad Joosub joined the franchise a year ago as Assistant Portfolio Manager, and the two complement each other really well as they have robust debates about the investments they add to the portfolios.
The flagship fund for the franchise, the Absa Property fund is an actively managed, pragmatic value fund which invests in the South African Listed Property sector. The secret sauce which makes the fund so successful and very different from the peer group is that the fund is not benchmark cognizant but is rather benchmark aware and unconstrained. This results in positions which can be vastly different from the benchmark holdings, and over the long term results in outperformance, with superior returns. The team is now managing another fund, which is benchmark cognizant and more suitable for those investors who have a lower risk tolerance and enjoy more predictable returns.
Based on the chart above, it’s no surprise that the Absa Property Equity fund won the Raging Bull award this year for Best South African Real Estate Fund, Risk-Adjusted return over 5 years. Furthermore, the fund has won multiple Raging bull awards* every year since 2014.
During the lunches, Fayyaz discussed the current difficulties in the property sector. Reported results from the property sector are reflecting the deteriorating conditions within the sector, with many companies now expecting lower growth in income for the next year. Fayyaz says “Expected total return used to be 12% to 15% over a rolling 3-5 year period, but the economy is tough, and there has been a structural change in the sector. Given that there is no growth in the economy, one needs higher income yields in order to achieve this total return target as growth tapers.” Another challenging dynamic impacting returns is the fact that contractual lease escalations on new leases are lower than historical levels, impacting the organic growth of the sector going forward. Load shedding is also a major issue for the sector as a whole as businesses in general struggle to operate and shopping malls without back up power trade poorly during periods when the lights are out. Looming elections are playing a part in halting business investment until there is more certainty. The Edcon recapitalization affected the sector but smart landlords are managing down that space well, letting out the space they have taken back at higher rentals and the impact will be well contained over the medium term. The sector has de-rated significantly which was painful for investors but has created buying opportunities, particularly of attractive stocks which had become prohibitively expensive for investors with a value bias.
The fund is currently sitting with a cash position of over 20%, which is a tactical position and this gives the team the ability to move fast when opportunities arise and they see attractive entry levels into their preferred stocks. The focus is on investing in companies with a combination of attractive yields and solid growth. The sector currently looks attractive on a valuation basis, offering high single-digit forward income yields, with growth expectations of 3% to 4% over the next 12 months which supports an attractive potential total return profile. Fayyaz is upbeat and optimistic about the future, as long as the lights stay on. On the bright side, pun intended, there are still a lot of companies with solid balance sheets, strong cash flows, and experienced management teams. The property team will continue to build on their already really solid foundation.
Raging Bull Awards won*