Environmental, social and governance (ESG) analysis could prevent listed property investors from exposure to a GFC-like shock, according to Takapuna-based manager, Pathfinder.
Paul Brownsey, Pathfinder chief investment officer, said listed property stocks were hammered in the wake of the GFC because they were over-levered and built on fragile funding structures.
“It was difficult to understand the [listed property firm] balance sheets,” Brownsey said. “But that wouldn’t have happened if they had good governance structures.”
He said selecting listed property stocks with good ESG scores has helped the Pathfinder Global Property Fund achieve a top-ranking performance during its just-completed inaugural three-year period.
Morningstar shows the $15 million Pathfinder global property fund as the best-performer over the one- and three-year periods out of eight portfolio investment entities (PIEs) in the asset class available to NZ investors. The asset class excludes funds that focus on Australasian listed property.
Brownsey said the result showed a NZ-based manager could compete successfully in the global listed property fund space, which comprises about 500 stocks overall.
After applying sector and country filters, Pathfinder whittles down the stock universe further by selecting listed property firms (also known as real estate investment trusts – or REITs) that score highly on ESG criteria as defined by research house, Sustainalytics.
Currently, the fund holds 99 property stocks directly.
“Holding the stocks directly without an outsourced manager allows Pathfinder to be more discerning around ESG and revenue exclusions compared to other PIE global property funds,” Brownsey said. “It also eliminates a layer of costs.”
Global REITs provide a much higher level of diversification than is available in the Australasian property market, he said.
As well as much deeper traditional property sectors – such as office, industrial and retail – global REITs, especially in the US, offer access to growing niche areas including: self-storage; data storage; cell phone towers; specialist healthcare; and, residential housing.
“There’s much more opportunity to diversify,” Brownsey said.
While Pathfinder doesn’t “actively trade” the underlying stocks, he said the firm reviews holdings every quarter and builds an “optimised portfolio” annually that takes into account the latest ESG scores.
“Current tilts to the fund that have influenced the one-year returns are an underweight REITs in the US with exposure to retail malls and an overweight to Japan,” Brownsey said.
He said global REITs were well-positioned to withstand rising inflation and interest rates, too, as the good operators had much lower leverage (compared to pre GFC) and cheap long-term funding locked in.
“Typically, rents rise along with interest rates and inflation, meaning listed property firms can increase revenue while keeping costs fixed,” Brownsey said.
REITs also tend to pay out steady income streams. US REITs, for example, are required by law to distribute 90 per cent of revenue as dividends – in exchange for some tax relief.
The Pathfinder global property fund has to date been supported mainly by financial advisers but could now be on the institutional radar after hitting the minimum three-year track record required by most consultants.