Location, location: Principal triumphs in property

A willingness to look offshore, as well as travel outside the index in Australia, has carried Principal Global Investors to a win in the property securities category of the Fund Manager of the Year awards.

The reward is just recognition for the giant US manager, which has topped Assirt’s Australian listed property trust (LPT) league tables over the past one, three and five-year time frames, returning a full 25 per cent in the 12 months to March this year alone.

It is also a major vindication of Principal’s decision to maintain a listed property trust presence in Australia after it sold out of its ill-fated marriage with BT in 2002 — a play that forced Principal to rebuild its LPT team from the ground up after the squad it inherited from BT jumped ship soon after the sale.

But it was the Principal strategy — implemented by lead managers Simon Hedger and Chris Lepherd — of investing up to 20 per cent of its property portfolio outside the Australian LPT index, including up to 10 per cent offshore, which really impressed.

Assirt associate director Veronica Gullo says: “Principal stood out. We believe it is an extremely competent manager of property. Its performance has been exceptional over an extended period of time. I think it comes down to the fact it is a really strong portfolio manager.

“It also includes some offshore listed property trusts and stocks in the portfolio even though it is an Australian property securities fund.

“Given the way the Australian property market is going, it is refreshing to see fund managers doing something different to try and add value because it is becoming more and more difficult.”

Principal has recently sold down much of its offshore and non-index exposure, but historically it has tracked pretty close to its maximum limits on both fronts.

“Over the past couple of weeks we have been bringing our offshore and non-index money into index stocks,” Lepherd says.

“We have partly benefited from an exposure to the Asian markets. We are now seeing that this is excessively valued so we have moved out of these stocks and back into Australia.”

Principal is not the only manager to explore more innovative ways to add value in a listed property trust sector where value is becoming increasingly difficult to spot.

Another of the finalists, Trafalgar, has added a small allocation to unlisted property syndicates within its LPT fund.

“Again, it is taking a slightly unusual approach to adding value, and it has been successful at that,” Gullo says.

That is not to say a degree of daring is mandatory. Citigroup has earned its place amongst the finalists with a far more conservative approach; one that permits only a rare bet outside the Australian LPT index.

“Our absolute returns have been good over the past 12 months, but we have had a consistent approach for the past 10 years,” Citigroup portfolio manager Stuart Cartledge says.

Various approaches aside, most LPT managers agree the sector is facing a tougher year in 2005, although the degree is still a point of debate.

While Cartledge believes the sector could drop from the 20 per cent plus returns of 2004 to single digits in 2005, Lepherd is expecting the market to register somewhere in the lower double digits.

All the more reason, according to Gullo, for managers to try something new.

“It is going to become increasingly more difficult for managers to add value above the benchmark and really that is what you are paying for from an active manager,” she says.

“What we like to see is managers taking advantage of different sub-sectors of the LPT market — whether that is bringing in some global property or whether it is bringing in something else — to add alpha without dramatically increasing risk.”