Property Securities
Property Securities Fund Update
September Quarter 2008
This update is for the BlackRock Property Securities Fund (Aust) (formerly known as the Merrill Lynch Property Securities Fund).
The performance shown in the Fund Update is the gross performance of the fund. To view the net performance of the fund or of the different unit classes of the fund download the Fund Performance Report or visit Fund Performance.
Gross performance returns and benchmark performance shown do not include expenses, fees or tax. Net performance returns are prepared on an exit-to-exit fee basis which includes all ongoing fees and expenses.
Performance review
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Gross
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Benchmark#
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Out-performance*
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3 Month
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-2.73%
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-1.26%
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-1.47%
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6 Month
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-17.35%
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-16.55%
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-0.80%
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1 Year
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-42.24%
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-40.44%
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-1.80%
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2 Year (pa)
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-17.31%
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-15.44%
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-1.87%
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3 Year (pa)
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-5.22%
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-3.51%
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-1.71%
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5 Year (pa)
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5.12%
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6.19%
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-1.07%
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Past performance is not necessarily a guide to future performance.
#S&P/ASX 200 Listed Property Accumulation Index.
*Shows the difference between Gross return and Benchmark return.
Long term performance returns show the potential volatility of returns over time. Gross performance figures quoted are calculated with no allowance for management fees, operating expenses or tax on income.
- The property sector finished the September quarter slightly down as the continued dislocation in global capital markets and several negative stock specific announcements weighed on performance.
- The Australian Listed Property Trust sector returned -1.2% for the quarter underperforming the broader Australian equity market by 9.2%. Over the period the Fund returned -2.73% (before fees) underperforming the benchmark index by 147 basis points.
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Key positive influences
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- Overweight positions in Macquarie Office Fund (+2.4%); and
- Underweight positions in Goodman Group (-21.4%), General Property Trust (-19.3%) and Mirvac (-16.2%).
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Key negative influences
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- Overweight positions in Becton Property Group (-63.4%), Reckson New York Property Trust (-51.8%); and
- Underweight positions in Commonwealth Property Office Fund (+16.6%) and Colonial First State Retail (+21.6%).
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Market review
- The Australian listed property sector experienced extraordinary volatility during the September quarter with 49 out of 66 trading days resulting in price movements of 1% or greater.
- The turbulent economic environment continued through the quarter with an unprecedented number of large scale events occurring in a short space of time.
- In the wake of the financial turmoil, central banks globally injected a massive amount of liquidity into the system in attempt to ease the credit squeeze.
- One of the key events of the sector reporting season in August was that many trusts chose to rebase distribution policies to better align dividends with underlying operational cash flows. We see this move as a positive and will reduce debt funding needs for the sector moving forward and more closely aligns payout policies of Australian REITS to their offshore counterparts.
- Office was the best performing sub-sector over the quarter rising 11.1%. The office sub-sector was buoyed by the strong performance of ING Office which rose 25.7% over the quarter.
- The retail sub-sector returned 5.0% also outperforming the broader sector.
- The diversified and industrial sub-sectors both underperformed significantly, returning -9.2% and -15.9% respectively over the period.
- In stock specific news, GPT announced an anticipated 27% fall in earnings to 21.2 cents per share. The downgrade was mainly attributable to lower forecast contribution for funds management, development earnings and a lower than anticipated contribution from there joint venture with Babcock and Brown.
- Macquarie DDR Trust (MDT -22.5%) fell heavily over the quarter after MDT’s largest tenant, US discount retailer Mervyns, announced they were filing for bankruptcy protection. Mervyns comprises 10.6% of MDT’s current rental income. While the announcement was clearly a disappointing one for MDT we feel that at current levels the stock represents compelling value.
- Westfield Group (WDC) announced to the market that it has acquired a holding of 2.96% in the UK listed REIT, Liberty International. Liberty is the largest owner of shopping centres in Britain. Post the announcement speculation mounted regarding Westfield’s longer term intentions for their stake.
Fund activity
- Having held an underweight position in GPT prior to the earnings downgrade announced in July we closed our underweight post the substantial fall in the share price.
- During the quarter we exited our position in ING Industrial Fund (IIF) due to concerns over the outlook for industrial property values and concerns over the high level of leverage within the vehicle.
- We also exited the position in Rubicon Japan Trust (RJT) over concerns about their ability to de-leverage through asset sales in a weakening commercial property market in Japan.
- We also exited our position in ING office Fund (IOF) as the stock price exceeded our valuation.
Market outlook
- The events of the last month and challenging macro economic environment are likely to result on further pressure on direct property prices.
- We believe that in order for a sustained rally to occur, liquidity will have to return to Australian and offshore direct property markets.
- Post the sell off in early October, by historical standards, extreme valuation support has emerged and the sector is currently trading on weighted average 2009 sector yield of 10.25%, a 515 basis point premium to 10 year government bonds.
Investment objective
The primary aim of the Fund is to achieve a total return consisting of dividends and capital gain through investment in listed property trusts and other property related securities. We aim to outperform the S&P/ASX 200 Property Trusts Accumulation Index over rolling five-year periods.
Fund strategy
The Fund is actively managed, meaning that we continually monitor and, where necessary, adjust the Fund’s portfolio to suit changing economic and market conditions.
The investment process is driven by a ‘bottom-up’ approach to trust and stock selection meaning that our investments are based on research of individual trusts and companies to determine their investment merits. Our evaluation of Listed Property Trusts and property companies considers the quality of management, the strength of the business franchise and underlying real estate and appropriate valuations. The portfolio usually holds between 20 and 30 stocks.
Designed for investors who…
- Seek a fund which aims to provide a regular income stream from a diversified portfolio of listed property trusts and property related securities.
- Seek growth over the long-term.
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