Funds Invested in European Property

The low interest rate environment continues to provide real estate companies with access to cheap debt. In the US, the macro environment has been favourable

Mathieu Caquineau, CFA 6 August, 2015 | 12:08PM
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Property stocks have rallied significantly over the past year, up 24%. But funds in the Morningstar Property category have returned 22.2% over this time – proving that beating the index is generally a hard task for managers in this asset class.

Property investors have to out-perform management fees and they often can’t invest in the smallest, less liquid holdings of their universe, particularly for those managing large pools of assets.

Rising Interest Rates Threaten Property Investment

The current low interest rate environment in Europe and the US continues to provide real estate companies with access to cheap debt. In the US, the macro environment has been generally favourable to the real estate sector but the threat of rising interest rates could be a headwind going forward.

In Europe, the Morningstar Property Indirect category posted a 21.5% gain, boosted by great gains in Germany. Germany has been one of the strongest performers in the Eurozone thanks to a major wave of consolidation in its once segmented real estate sector. The FTSE EPRA/NAREIT Germany index increased by 31.3% over the past 12 months.

Funds Invested in European Real Estate

AXA World Funds Framlington Europe Real Estate, rated Silver by Morningstar, has clearly benefited from the buoyant German market with a strong stock selection in the country. It has been one of the better performers over the past year in the Morningstar Property Indirect Europe category with a 21.6% returns and a second quartile ranking.

The fund is managed by Frédéric Tempel who has been a successful investor in real estate stocks for over 10 years. Three managers, organised by geographical area with one dedicated to Europe, support Tempel in the analysis and management of the fund.

Tempel targets real estate stocks in Europe that he considers of quality by first excluding companies with poor transparency in terms of corporate governance. A fundamental analysis then assesses the viability of the business model, the valuation and the identification of catalysts. This investment strategy has proved its worth over time with above average risk-adjusted performance since its inception in 2009.

Schroder International Selection Fund Global Property Securities, rated Neutral by Morningstar, has delivered results in line with its peers. It is still early days for the new team behind this fund. Schroders brought the management of this strategy in-house in August 2014 and hired Tom Walker and Hugo Machin from AMP Capital to head this team.

They have good-quality industry experience, albeit predominantly European-focused. Their Asian offering is more robust in our view even though it has not fared very well in the past 12 months. Schroder ISF Asia Pacific Property Securities, rated Bronze by Morningstar, has significantly lagged the Morningstar Property Indirect - Asia category over one year (+19.1% against +23.8%). Stock selection hurt relative returns in Japan and Hong-Kong. This fund is a worthy option however.

Portfolio manager Adam Osborn has dedicated his 23-year investment career to covering Asian real estate. He is ably supported by an experienced group of seven country analysts. Osborn has built an impressive long-term track record with this fund. With a robust investment process and reasonable fees, we believe this fund is an attractive way for investors to get dedicated exposure to the Asian real estate sector.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AXAWF Eurp Rl Est Secs A Cap EUR205.51 EUR-2.09Rating
Schroder ISF Global Cities A Acc USD172.65 USD-0.31Rating

About Author

Mathieu Caquineau, CFA

Mathieu Caquineau, CFA  Senior Fund Analyst, Morningstar France

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