September 2014
For professional investors and advisers only. Not suitable for retail clients.
Schroders
Property multi-manager:
the investment case
The case for UK Property Multi-Manager (UKPMM)
Investing with a property multi-manager service should
provide three key benefits: consistent total returns through
diversification and active portfolio management; access to
opportunities which would otherwise not be available; and the
outsourcing of administration and governance of the underlying
investments. This paper examines all of these benefits in turn.
Anthony Doherty,
Fund Manager,
Property
Multi-Manager
at Schroders
Providing consistent returns through active portfolio management
The total returns of Schroders UK multi-manager accounts have proved to be more consistent
than those of the balanced funds included in the AREF/IPD UK Quarterly Property Fund Index
(“the Index”). To illustrate this, the chart below compares the range of returns delivered by
balanced funds in the Index with the best and worst performing multi-manager mandates across
Schroders 30+ accounts. Taking the past year as an example, the range of total returns of the
best and worst performing balanced funds in the Index has been 11%. In comparison multi-manager
investors have enjoyed a more consistent range of performance (4.1%). This is a theme that has
held over all time periods.
This is a result we should expect. One of the key characteristics of a multi-manager portfolio
is diversification, not just in the breadth of underlying assets but also of the managers and
investment houses which drive the performance of those assets. A good multi-manager should
be able to avoid the worst performing funds, and at the very least only have part of his portfolio
exposed. The extremes of performance should therefore be avoided.
Figure 1: UKPMM, track record – range of portfolio total returns
Range in UK total returns to 30 June 2014
25%
20%
15%
10%
5%
0%
1 Year
3 Year
5 Year
UKPMM
Index
Source: Schroders; AREF/IPD UK Quarterly Property Fund Index, June 2014.
10 Year
Schroders: Property multi-manager: the investment case
Greater consistency of returns through diversification is one thing but do multi-managers add value
over and above the fees they charge? In the chart below we have shown the entire total return
history of Schroders UK Property Multi-Manager investments net of all management fees since
the inception of our multi-manager business (blue line). This is compared with the performance of
the Index and the best and worst performing funds within the Index over the same time period. It
shows that in addition to avoiding the extremes of performance provided by the best and worst
performing balanced funds the UK multi-manager investments have also outperformed net of fees.
Figure 2: UKPMM, Index of total returns net of all fees
Index of total returns (adjusted for cost of entry and UKPMM overlay fees)
Index
280
240
200
160
120
80
Dec 99
Dec 01
Dec 03
UKPMM
Dec 05
Index
Dec 07
Best Fund - Index
Dec 09
Dec 11
Dec 13
Worst Fund - Index
Source: Schroders; AREF/IPD UK Quarterly Property Fund Index, June 2014.
Notes: UKPMM returns is a composite Index of the performance of the UK investments of all Schroder multi-manager clients
weighted by assets under management and net of management fees. Index returns are those calculated by AREF/IPD
adjusted for purchase of units in December 1999 at offer price.
So how has this been achieved? A multi-manager can add value in two ways: selecting
outperforming property funds and positioning the portfolio towards the best performing property
sectors (and away from the worst).
Selecting the best property funds
The table below shows that most balanced funds have peaks and troughs through a cycle. Since
June 1999 eleven of the largest fifteen balanced funds have claimed the title of best performing
property fund over a twelve month period. However, nine of the same fifteen funds have also
had the less favourable accolade of being the worst. Of course this analysis also has an element
of survivor bias as some of the balanced funds which have performed particularly poorly are no
longer in the Index. One balanced fund is no substitute for another – each has its own unique
assets and investment characteristics. A successful multi-manager should understand this and be
able to assess which fund is likely to outperform at a given point in the property cycle, selecting
the allocations within his portfolio accordingly.
Schroders: Property multi-manager: the investment case
Figure 3: Wide ranges of returns from UK balanced funds
Rank (June)
Fund Name
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
AVE.
Rank
BlackRock UK
Property Fund
5
9
1
14
12
3
11
1
3
12
10
7
9
6
9
11
8
Standard Life Investments
Pooled Pension
Property Fund
7
5
7
13
13
12
12
6
10
7
11
5
10
12
11
7
10
Legal and General
Assurance (Pensions
Management) Ltd
12
10
12
10
2
5
2
10
13
8
4
6
11
7
6
9
8
Schroder UK
Property Fund
4
8
9
15
15
13
9
2
1
15
12
3
6
4
4
4
8
Threadneedle
Pensions Ltd
3
4
5
3
3
7
6
12
12
2
1
13
14
9
8
8
7
Aviva Investors Pensions
8
13
3
12
6
2
1
13
8
10
6
9
13
10
13
11
9
UBS Triton
Property Fund
2
1
4
1
5
6
13
5
11
13
13
15
1
11
15
1
8
Hermes Property
Unit Trust
14
15
15
5
1
11
4
4
2
4
9
4
2
3
3
5
7
Threadneedle
Property Unit Trust
15
6
6
8
8
9
5
9
6
1
5
10
15
13
5
10
9
Lothbury
Property Trust
N/A
N/A
2
11
11
10
3
3
5
9
8
2
7
2
1
15
6
The M&G UK
Property Fund
10
12
11
7
9
4
8
11
14
6
7
12
12
8
10
14
10
The Charities
Property Fund
N/A
N/A
N/A
2
10
14
15
14
9
11
2
8
5
1
2
6
8
FL GM
Property Fund
13
11
8
9
7
8
14
15
15
3
3
11
8
14
12
13
11
Rockspring Hanover
Property Unit Trust
1
3
14
4
4
1
10
8
4
5
14
14
3
15
14
3
8
CBRE Lionbrook
Property Fund
6
7
10
6
14
15
7
7
7
14
15
1
4
5
7
2
8
Source: Schroders; AREF/IPD UK Quarterly Property Fund Index, June 2014.
Notes: The table shows the largest 15 funds in the AREF/IPD Quarterly Property Fund Index – All Balanced Funds sample
(‘Index’) as at end June 2014. A fund’s rank is determined by its annual total return for a given year compared with the 15
largest funds in the Index at the end of that year. The Average Rank is the mean average of each fund’s rank over the past 15
years or since its inception if sooner.
Schroders: Property multi-manager: the investment case
Achieving best pricing
Selecting the right funds is only part of the added value process, the price achieved on purchase or
sale is also crucial. Property is an expensive asset to trade. The offer price of a balanced property
fund is typically 4-5% above its net asset value price. Those investors with the ability to access their
favoured funds on the secondary market – i.e. buying or selling units directly with other investors in
the fund – can add value to the performance of their portfolios by achieving best pricing.
We have transacted in excess of £1 billion of secondary market trades over the past three and a
half years alone, which has represented on average half of total investment turnover (see chart
below). We estimate that the pricing achieved on these sales has on average added 0.1% to the
annual performance of our clients’ portfolios compared with the performance of the accounts if
acquisitions were undertaken at valuation price. Moreover, if the secondary market had not been
utilised and trades were undertaken at the full spread client returns would likely have been diluted
not improved.
Figure 4: Volume of secondary market trading and % turnover
£ 000’s
500
450
400
350
300
250
200
150
100
50
0
% turnover
70
60
£437.5
50
£373.3
40
£217.4
£116.3
2007
30
£225.3
£180.4
20
£103.2
£52.1
2008
2009
10
2010
Secondary Trades (volume)
2011
2012
2013
0
2014
Secondary trading (% turnover)
Source: Schroders, June 2014.
Picking the right sectors
Sector exposure is also an important source of added value. By manipulating the sector profile
of a portfolio a multi-manager should be able to position it towards those sectors of the market
which are expected to outperform and away from those which aren’t. This part of the investment
process – the ‘top down’ approach – is generally research driven and is part of most property
fund’s investment process. However, for multi-managers the ability to use a secondary market for
units in funds provides an additional tool with which these sector positions can be controlled.
At Schroders we have been back-testing the accuracy of our ‘top down’ House View for over
ten years (see chart below). On average we estimate that getting the sector calls right for our
portfolios has added over 0.2% to performance per year.
Figure 5: Schroder House View – back test
Structure score
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Jun 02
Jun 04
Jun 06
Schroder House View (3 years earlier)
Source: Schroders, September 2014.
Jun 08
Jun 10
Long-term average (3 years)
Jun 12
Jun 14
Schroders: Property multi-manager: the investment case
Accessing opportunities which would otherwise not be available
Access to the best investment opportunities is imperative. Sometimes, the best funds are closed
to new equity or the pricing on the secondary market is too high. At other times, investors may
wish to follow a particular strategy – to avoid leverage for example or to invest in up and coming
alternative property sectors – for which a suitable fund may not exist. In these circumstances,
those multi-manager houses with sufficient scale can provide their clients access to these
strategies by structuring bespoke funds in partnership with specialist third-party investment
advisers acting on their behalf.
When structured correctly, the advantage of a ‘partnership’ solution is that an investor can benefit
from the specialist expertise of a third-party investment manager to deliver a particular investment
strategy while using the low marginal cost of their investment manager to structure and administer
a special purpose vehicle through which the investments are made. This structure can also be
set up with modern, institutional grade governance and risk management controls which the
multi-manager can tailor and oversee on behalf of his clients.
Since 2010 our UK multi-manager team has structured six bespoke funds, allocating over
£700million of client equity. All of these funds have been structured with specialist third party
advisers, focussing on niche areas of the market and operate within Schroders group governance
and risk management controls.
Outsourcing administration and governance
The time and resource required to administer investments in property funds should not be underestimated. In the twelve months to end June 2014 our UK multi-manager team has voted on 23
different Extraordinary General Meetings, each of which has required thorough analysis and due
diligence prior to a vote being cast. An advantage of investing with a multi-manager service is that
the due diligence and administration required for these votes, and the time and costs associated
with their execution can be outsourced.
Importantly, investing with a large multi-manager house can also ensure that an investor’s influence
over key decisions regarding the management of the fund is leveraged as multi-managers often
have seats on advisory committees or have more meaningful stakes in aggregate in funds with
which to manage their influence. Having a bigger say at the negotiating table can be helpful
when fund managers are looking to change key terms of the fund such as management fees or
redemption procedures.
Contact us
To discuss the themes in this article further please email us at property@schroders.com
www.schroders.com/property
Important information: The views and opinions contained in the article are those of Anthony Doherty, Fund Manager, Property Multi-Manager at Schroders,
and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and
advisors only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional
material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and
should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Property Investment
Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or
restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory
system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the
document when taking individual investment and/or strategic decisions. Any forecasts in this document should not be relied upon, are not guaranteed and are provided
only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume
no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Past
performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors
may not get back the amount originally invested. The Schroders Property Multi-Manager Service will involve investment in unregulated collective investment schemes, as
defined in the Financial Services and Markets Act 2000 (“the Act”), and consequently, all or most of the protections provided by the UK regulatory system do not apply
and compensation under the UK Financial Services Compensation Scheme will not be available. Property-based pooled vehicles such as property unit trusts, invest in real
property, the value of which is generally a matter of a valuer’s opinion. It may be difficult to deal in the units or to sell them at a reasonable price, thus creating a liquidity risk.
There may be no recognised market for units in the Funds and, as a result, reliable information about the value of units in the Funds or the extent of the risks to which they
are exposed may not be readily available. A potential conflict with the Manager’s duty to the client may arise where the Manager invests in units in a Fund(s) managed by
itself or an Associate. However the Manager will ensure that such transactions are effected on terms which are not materially less favourable than if the potential conflict had
not existed. Use of IPD data and indices: © and database right Investment Property Databank Limited and its Licensors 2014. All rights reserved. IPD has no liability to any
person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any of the information which may be attributed to it. Issued by Schroder
Property Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1188240 England. Authorised and regulated by the Financial Conduct
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