JOHANNESBURG – Proponents of equity investing over the long term point to the fact that it is the best performing asset class after tax and inflation. This is certainly true for discretionary investments, but lacks substance when it comes to investments within a retirement product such as a retirement annuity, preservation fund or living annuity fund. Local property returns are NOT taxed in these vehicles, and as a result have delivered equity beating returns (at significantly lower levels of risk) over the long term.
When it comes to structuring a portfolio for retirement savings we believe that investors can benefit from a higher exposure to listed property. However, it must be noted that Regulation 28 limits the exposure that one can have to listed property to a maximum of 25%. We do not believe that this is a serious issue though. A Cadiz research report in 2010 (SA Property – Missing the love?) showed that the optimal property exposure needed to achieve an inflation linked target ranged between 10% and 21%. So investors seeking higher returns would have been well served by listed property exposures under the 25% limit.
Industry statistics show that unit trust investors (a good proxy for investors in general) are significantly underweight in this asset class. Stats to March 31 2012 show that only 4% of unit trust assets are invested in listed property. Multi-asset class funds such as balanced funds, flexible funds, real return funds, and flexible income funds had a 2% exposure to listed property on average. A cursory glance at these numbers over the long term shows this to be an asset class that is repeatedly ignored by asset allocation and fixed interest managers.
Research by leading listed property specialists Catalyst Fund Managers showed that the bulk of property returns (60%) for the 16 years to 2010 came from rental income, and the remaining 40% from capital growth. This is despite the phenomenal capital returns delivered by the sector in the mid 2000s. This is encouraging for prospective retirement investors as there is little volatility around the income component of listed property funds. The rate of growth of income returns have dropped, but they are still growing despite tough economic conditions since 2008.
The compounding effects of reinvesting a growing income stream can be significant over time. R1m invested in a certain property fund in September 2003 – when the fund was launched – would have yielded rental income of over R1.2m by the end of March 2012. The capital growth would have been in the order of 90% over the same period. Had the investor simply re-invested dividends, the capital value of that investments would have been close on R4m by end March 2012.
We are not forecasting listed property to continue outperforming equity going forward, but we believe that its ability to deliver a growing income stream over time and its lower risk profile makes it an attractive option for inclusion in retirement portfolios in particular. We continue to combine these funds with dividend yielding equities (also a source of growing income streams which are re-invested), and other assets, to provide investors with a portfolio that strikes a balance between risk management and growth. We favour the Catalyst SA Property Equity fund, as well as the Old Mutual SA Quoted Property and Stanlib Property Income funds.
Source: Morningstar 31 March 2012.
Craig Gradidge, CFP® is cofounder of Gradidge-Mahura Investments, a new generation financial planning business based in Melrose Arch. Email him: craig@gminvestments.co.za