Real Estate Research
Property multi-manager: the investment case
The property multi-manager investment model is now well into its teens. At Schroders we took on our first client in 1998. Like most teenagers the model has had to cope with growth spurts as well as growing pains: the worst economic downturn in living memory, a 45% peak to trough decline in commercial property valuations and more recently the threat of eurozone break up.
The property multi-manager investment model is now well into its teens. At Schroders we took on our first client in 1998. Like most teenagers the model has had to cope with growth spurts as well as growing pains: the worst economic downturn in living memory, a 45% peak to trough decline in commercial property valuations and more recently the threat of eurozone break up. Despite these challenges the model has endured and grown successfully to become a core component of our property businesses. This note explains how.
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. So 15 years on how have we fared?
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, an investor might have chosen the best performing balanced fund and achieved 10% total returns. Then again they may have selected the worst performing fund and received -10% total returns. In comparison, for multi-manager investors a more consistent range of performance has been delivered, and this pattern 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 afforded 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.
Greater consistency of returns through diversification is one thing but can 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 (black 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.
So how has this been achieved? A multi-manager adds 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 property fund managers 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, managing allocations within his portfolio accordingly.
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