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Listed property tops the 2010 return race

20 January 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Fund managers and financial planners agree that long-term portfolio performance hinges on getting the asset allocation decision right. That’s the easy part. The difficult part is making sure your client’s portfolio reflects the correct mix of equity, listed property, bonds and cash over time. In recent years financial planners have been relying on increasingly popular asset allocation funds, particularly in the unit trust space, to do the job. At 30 September 2010 these funds accounted for 25% of total assets under management in the domestic equity space, some R206.587 billion!

What does the typical asset allocation fund look like? The Association of Savings and Investments SA (ASISA) lists a variety of funds largely based on the level of equity exposure – low, medium, high or variable. I looked at the latest fact sheet for the Allan Gray Balanced Fund as an example. They describe the fund as a Domestic Asset Allocation Fund – Prudential – Variable Equity. At 31 December 2010 this fund was invested in a mix of local and offshore equities (59.8%), hedged equities (8%), property (0.2%), commodities (3.3%), bonds (10%) and cash and money market (18.7%). Apart from the limited listed property exposure the average South African investor will probably be quite happy with the fund’s conservative (bonds/ cash / money market) leanings.

A mixed bag of returns

Had you invested in this fund last year you’d want to know whether, based on asset class performances and the individual unit trust mandate, the Allan Gray team got their asset allocation right? I’m guessing some investors will be a bit miffed at the low exposure to listed property given the stellar performance from this asset class through 2010. Listed property trashed the rest of the asset classes with its 29.l% total return – compared with total returns of 18% from equities, 15% from bonds and 6.5% from cash.

The “low” exposure to listed property and relatively high exposure to money market and cash probably contributed to the Allan Gray balanced fund underperforming its own benchmark last year. Performance was subdued at 10.4% versus the 12.4% benchmark. Over three and five years the fund’s annualised performance isn’t looking great either, but over the long-term – 10 years – the fund has achieved a respectable 19.2% annual gain!

The best asset allocation strategies through 2011

Where will the asset allocation specialists be investing your money this year? Most equity analysts are predicting a tough 2011 and those I’ve spoken to thus far aren’t confident the All Share Index will repeat even the “middle of the road” 2010 performance. Cash is trash, bonds had a good year last year which they’re unlikely to repeat and the jury is out on prospects for listed property through 2011. Some say the yields form property will suffer if the interest rate cycle turns.

I reckon it’s going to be a neck and neck race between equities and listed property once again. The interest rate cycle will only turn late in 2011 so we should see solid returns from the property class until then. Norbert Sasse, chairman of the Property Loan Stock Association and CEO of Growthpoint Properties reckons listed property will be the place to be this year. His sentiment is backed up by Avior Research, which anticipates that given stable bond rates through 2011, listed property will achieve total returns of 15.6% (comprising of 7.5% capital return and 8.1% from income return).

Even so, I expect few asset allocation funds to be overweight property this year. They’re going to stick with traditional equities for their return. Craig Pheiffer, General Manager (Investments) at Absa Investments reckons the best New Year’s resolution equity investors can make is to stay calm. He says a panic-free year will probably save investors money as well as their nerves!

Investors must resist the temptation to chop and change asset allocations on short-term market fluctuations. Last year many local investors exited the equity market after a slight pullback in the first quarter – with the result they missed out on the 18%-plus total return for the year. “A little more resolve and a longer term view would have resulted in significant gains,” says Pheiffer. “In 2011 we expect most investors to remain in the market, if only because results in 2010 illustrated the danger of staying out of it!”

Major 2011 risks

The global economic recovery remains fragile. Sovereign debt remains a problem in the Euro-zone, with the threat of rising inflation hanging like a cloud over the US, UK and Japan… South Africa is still part of the world stage and our economy will respond to these macroeconomic forces as they play out. Says Pheiffer: “Our market is acutely sensitive to international inflows and outflows and a correction may well occur, but until then we believe most local investors will stay in the market, stay diversified and stay focused on the long term.”

Editor’s thoughts: Every year we repeat the same message: “Don’t respond hastily to short-term market fluctuations.” Despite the warning investors flee for the deceptive safety of cash at the first sign of trouble. Are you still inundated with request from investors who want to reduce their equity exposure due relatively poor three-year returns? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by tomp, 23 Jan 2011
I read your article on listed property and as I, a private investor trying to make ends meet, was about to exit this asset class ,it has left me a little confused. IE:The Investec property equity fund has lost steady share price for the last three months as the interest rate drops and rents follow,and presumably, investors.As the interest rate is likely to remain low for at least a year, keeping rents low; i do not see how the sector can do well unless it pays a very handsome dividend,....or have i got it all wrong? Tomp...(all confused)
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