A significant buying opportunity has opened up in the TR Property Investment Trust given its widened discount, according to Hawksmoor, which has recently bought the closed-ended fund for its portfolios on the back of increased Brexit fears.
Having been a highly profitable area of the market over recent years thanks to an improving economic backdrop and demand for income, property funds (both direct and indirect) have witnessed a painful start to 2016.
Not only have many investors locked in profits due to the concern that returns from the asset class will naturally slow, the uncertainty surrounding the upcoming EU referendum has caused a general sense of nervousness towards UK property.
Data from the Investment Association shows that direct UK property funds saw net outflows in each of the first three months of the year, a trend that has only increased of late. Also, discounts on direct property trusts have widened.
According to the AIC, 90 per cent of IT Direct UK Property trusts are trading on either lower premium or wider discount than they have done over the past 12 months on average, while half of them now trade on a discount to NAV.
The downward discount volatility is even starker the AIC’s only UK property share fund – the TR Property Investment Trust.
TR Property Investment Trust’s absolute discount/premium over 3yrs
Source: FE Analytics
As the graph above shows, the trust – which is managed by Marcus Phayre-Mudge – had traded on a premium of 1 per cent at points over the past year but that has widened out considerably to a 12.3 per cent discount to NAV of late.
The team at Hawksmoor have looked to cash in on this, though. Richard Scott, Daniel Lockyer and Ben Conway – who run the Hawskmoor Distribution fund – have been buying shares over recent weeks as they rate the manager, are attracted to the yield and believe its current discount offers a strong margin of safety.
“We added to Distribution’s holding in TR Property at a price that we believed represented a ‘double discount’,” the team said.
“Probably due to fears of a Brexit, TR Property’s own share price had been derated to a mid-teens discount while its underlying property companies, including Land Securities, had also moved to substantial discounts to their book value.”
“This represented a decent margin of safety where we believed it was an attractive investment regardless of short-term risks such as whether the UK will leave or remain in the EU.”
Interestingly, though, while shares in the trusts have widened to a significant discount it has had little effect on an investor’s total return. According to FE Analytics, the trust has returned 2.65 per cent over one year compared to a 3.37 per cent loss from the FTSE All Share.
This dynamic is better shown in the graph below, which highlights the share price and NAV performance of the trust over the period. It illustrates that the underlying NAV (in blue) has performed strongly over 12 months despite more negative sentiment towards its shares.
Trust’s price and NAV performance over 1yr
Source: FE Analytics
The trust has been a strong long-term performer as well. Since Phayre-Mudge took charge of the portfolio in October 2004, it has returned 295.73 per cent compared to a 123.27 per cent total return from the FTSE All Share.
TR Property, which yields 2.8 per cent, has gearing of 11 per cent and has ongoing charges of 0.69 per cent minus a performance fee, invests in pan-European equities and UK direct property, with 37 per cent in UK property shares, 66 per cent in continental property shares, 9.4 per cent ‘bricks and mortar’ as well as an allocation to corporate debt.
Top 10 holdings include Derwent London, British Land and Great Portland Estates.
Scott, Lockyer and Conway’s decision to buy the trust certainly contradicts Hawksmoor Model Portfolio Service’s (which is another part of the business) move to sell completely out of M&G Property due to concerns about the outlook for the market.
“The reason behind the disposal is the deteriorating outlook in the UK commercial property market after seven years of strong returns,” the team told FE Trustnet recently.
However, Scott, Lockyer and Conway believe TR Property’s discount has moved too far too quickly, suggesting that big bounce back could be seen if the UK decides to remain in the EU.
Though they have been buying the trust, the managers say it represents one of the few opportunities left in what is turning out to be an increasingly dangerous market.
“Corporate earnings are deteriorating; according to Investec Asset Management the earnings per share for companies in the MSCI World Index is declining at the fastest pace since 2009 and are now in aggregate 14 per cent below their peak in August 2014 and back to where they were five years ago – equity prices however are 25 per cent higher,” the managers said.
“In the long run, the direction of the stock market will be determined by the earnings growth of the underlying companies and less by central bank comments or actions.”
“The difficulty of managing money is knowing when that relationship will be re-established or what the catalyst will be, so rather than attempting to forecast where prices will be in the future, we are generally maintaining the funds’ relatively cautious stance by owning a portfolio of assets that we hope to generate attractive risk adjusted returns and that are less reliant on the direction of equity markets.”
Since its launch in April 2012, Scott, Lockyer and Conway’s £54m Hawksmoor Distribution fund has been the top quartile performer in the IA Mixed Investment 40%-85% Shares sector with returns of 47.51 per cent.
Performance of fund versus sector since launch
Source: FE Analytics
It has outperformed in each calendar year since launch (and is doing so again in 2016 so far) and has been top decile for maximum drawdown, annualised volatility and risk-adjusted returns since inception.
Top 10 holdings include Fidelity Global Enhanced Income, Royal London Short Duration Global High Yield Bond and Polar Capital Global Convertible. Hawksmoor Distribution yields 3.68 per cent and has a clean ongoing charges figure of 1.88 per cent.