Investment Focus: M&G Property Fund outpaces its peers

Having launched only just over three years ago, the M&G Property Fund, managed by Yusuf Mowlana and Rahgib Davids, quickly proved its mettle by winning the Raging Bull Award for “Best SA Real Estate General Fund” for its straight performance over the three years to 31 December 2023, as soon as it was eligible.

As shown in the table, the fund has delivered impressive outperformance compared to its ASISA category peers, and ranks #1 or #2 over the latest annual periods to 29 February.

M&G Property Fund performance history

Source: IRESS and Morningstar data to 29 February 2024

Using a valuation-based approach, the fund managers consider not only individual stock valuations, but also property sector fundamentals, diversification and valuation support from the risk-free rates when building the fund. Stocks must be of high quality, with attractive risk-adjusted total return prospects that are underpinned by healthy free cash flow generation.

In terms of the fund’s current positioning, the managers are finding good value and diversification benefits in offshore names with strong fundamentals, such as NEPI Rockcastle -- which is the fund’s largest holding --Sirius Real Estate and Hammerson. The latter two stocks contributed very good value to fund outperformance over the three-year award period, ranking in the top-10 contributing stocks.

In South Africa, the managers have been avoiding exposure to the office sub-sector given the ongoing subdued conditions. They prefer high-yielding mid- and small-capitalisation REITs such as Dipula B shares and SA Corporate, positions that also contributed notably to the fund’s top performance in the past three years. SA Corporate’s exposure to the recovering residential property sub-sector, with annual rental adjustments, meant that the group has yielded higher than the sector average but with below-average downside risk to cash flows.

More recently, large-cap SA property stocks such as Growthpoint and Redefine are offering compelling value in terms of yield and re-rating potential should bond yields and interest rates decline in 2024 and beyond.

Looking ahead, we have seen that SA property sector fundamentals have shown signs of stabilisation  in the most recent reporting period. It should also be aided by the strong prospects for global and local interest rates to decline from mid-2024. This could create an environment conducive for the sector to re-rate. However this will depend on the pace of interest rate cuts and economic growth – given that it takes time for lower interest rates to make an impact on the economy, earnings growth is likely to be muted over the short- to medium term.