The recent rout in global credit markets and subsequent falls in Australian and international sharemarkets have focused many investors on risk management within their portfolios. There is a natural flight to quality at times like this.

We have had a number of clients call and ask about the effects of recent events on their portfolios. We are pleased to be able to tell our clients that risk management has been a strong feature in their portfolio construction since the outset. Some of the aspects of our approach that have protected clients in recent times include:-

Active Manager – Moving against the herd
We have a belief in active portfolio management. Active management is based on the belief that investment markets provide sufficient inefficiencies to be exploited by the astute investor. It includes the art of stock selection where investments are included in a portfolio following a process of research and investigation. Active management can also refer to market timing strategies. For example, utilising a contrarian approach to counter the herd mentality of investors. By selling out of market segments that become popular and overvalued and buying into less popular, undervalued segments investors can outperform the broader market over the long term.

In selecting active managers there are many aspects we consider including the experience of the team, fund ratings and investment styles. Apart from seeking experienced, quality and well rated managers we also look for style diversity. We don’t want to include in a portfolio different funds that are essentially doing the same things. Our approach delivers a quality, diversified portfolio which reduces overall risk.

Careful Fund Selection – Contrarian Investing
The use of hedging and short selling strategies such as those used in the BT Global Return Fund and the Platinum International Fund used in many of our clients’ growth focused portfolios has provided a strong counterbalance to recent market corrections. These funds have in fact benefited from the recent falls showing good performances relative to their benchmarks.

The use of the funds such as the APN Property for Income Fund No 2 has proved to be a safe haven as the fund focuses on the income side of the property sector avoiding the higher risk development and debt ridden side. In addition the fund has moderate exposure to the fast growing international property trust sector providing greater diversity and consequential risk reduction.

Sensible Gearing
We have never been keen on high margin loan gearing levels for clients. Much of the more recent falls in the Australian share market has been the result of de-leveraging. This is the forced sell down of those who have over borrowed through margin loans, CDO’s and other methods to invest in a booming market. We have a target gearing ratio for margin loans of 50%. This means our clients are nearly never required to sell into a falling market to repay loans. It allows clients to ride through market corrections giving time for investment in good quality assets to recover to fair value at a future time.

Currency and Regional Allocation
Over the past year we have recommended modest increases in international exposure for portfolios taking advantage of the high Australian dollar to buy into these markets. In addition we have favoured unhedged international shareholdings. This has protected clients against the recent strong fall in the Australian sharemarkets and in the Australian dollar.

It is important to remember that quality investments will rise to their true value over time and that short term booms and busts are very often driven by sentiment and other factors that have nothing to do with the longer term value of a portfolio.

Andrew Condell

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The Listed Property Trust sector has corrected sharply in recent months but strong performances earlier in the year have carried the sector through, which means the sector is strongly in the black for the last 12 months. Financial Keys asked APN Funds Management, a leading Australian property funds manager on their thoughts for this sector.

The LPT (Listed Property Trust) sector has delivered 25.9% over the last financial year and over the last 10 years has now delivered an average return of 14.5% pa, defying its lower risk profile by still outperforming shares, which delivered 13.2% over the same period. However investors who have not diversified within this sector may well have suffered this year or at least experienced significant volatility along the way. This has been due to significant variations in the returns from individual LPT’s and increasing volatility during parts of the year, according to APN Property Group.

Mr Michael Doble, Director Retail Funds for APN said, “this year’s performance was a dramatic reminder of the need to diversify, with one LPT losing 2.1% while at the other extreme the highest return of 140.5% was achieved by Trinity Consolidated Group.

“Some investors can sometimes get caught up in a rising market and think that investing in any LPT will serve as a reasonable proxy for the returns from the property market generally. This type of strategy is fraught with danger.

“In the last six months the LPT index fell 0.11%, whereas our domestic property securities funds delivered returns of 7.7% (APN Property for Income Fund No 2) and 4.2% (APN Property for Income Fund) respectively.”

Mr Doble also noted that this was an excellent result and reflected APN’s much lower risk profile for its property securities funds than the LPT index.

“We focus significantly on sustainable income returns from LPT’s and avoid those property securities with a higher risk profile in their earnings from such activities as undertaking corporate activities and development.

“What our clients and most LPT investors want to achieve is consistent income returns. Investors don’t thank you when they are relying on a reasonably consistent return only to find prolific volatility. Volatility does not work well when you are retired and need to pay bills or go on your next holiday.

“The message has to get through to investors that diversification with LPT investments is essential risk management. Sure, the sector produces consistent income but the investor still needs to manage risk.”

The other key takeout from the performance of the sector apart from the obvious M&A
activity, was the strong performance of the office market LPT’s averaging an increase of 32.8%, ahead of all other property sub sectors.

“This office market outperformance was consistent with our view that the sector was undervalued and we have held this view and invested overweight office. The performance of the Perth and Brisbane office markets have been particularly strong where vacancy rates have fallen to 0.9% and 1.7% respectively.”

In Perth, the resources sector continues to fuel very strong demand for office space and in Brisbane the economy has been expanding at greater than the national rate.

“Combine these factors with low levels of new supply coming on stream in the short term and you have a recipe for a strong office sector” Mr Doble concluded.


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International Listed Property Trusts or REIT’s have been a strong performing asset class with the sector index returning 35.8% for the 12 months ended May 2007. (UBS Global Real Estate Inv Ex Australia – Hedged).

Sharp corrections in June through to August have brought the sector back to more reasonable valuations but this has not dented the enthusiasm for the huge opportunities that exist in this emerging asset class.

Australia has been a world leader in the securitisation and listing of property investments for many years. But with Australia’s top 5 listed property trusts now representing 65% of the market there is a need to look afield to avoid local market concentration and to find value in the newly expanding European and Asian markets.

Australian LPT’s have been investing offshore in recent times but this has been highly concentrated in the more mature US market. Europe, the UK and Asia have embraced the securitisation of property and in recent times legislation has been introduced in those regions to facilitate this expansion. It’s an exciting new frontier for experienced Australian property managers and the opportunities are there to repeat the incredible success that this sector has enjoyed in Australia.

There is a strong case for including international REIT exposure in diversified investment portfolios. However any currency risk should be protected with a full hedge back to Australian dollars. The benefits not only include regional diversity but also sector diversity with opportunities in segments that are not available in Australia.

But the most compelling case is the availability of stock. In Australia just about any quality property that has the potential to be securitised already has been. Whereas in Europe and Asia there is a new world of opportunity opening up for the astute manager.

Andrew Condell

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The 2007 financial year was another year of phenomenal investment returns. The beginning of this financial year however has been a lesson in volatility of investment markets.

The S&P/ASX 300 Accumulation index rose 29.1% over the 12 months to 30 June. This was driven by a combination of strong economic growth, company profits and increased merger and acquisition activity. There was an enormous $292 billion of M&A deals in Australia, a doubling of the previous years figures. There was also $62 billion of capital raised on the ASX during the year with 220 new listings.

Large companies on the ASX weren’t the only winners for the year. The Australian Listed Property Index and S&P/ASX Small Ordinaries Accumulation Index did well with increases of 26.32% and 43.53% respectively for the year. The rise in the Australian dollar stifled returns for Australians investing in global equities, with the MSCI Accumulation Index (A$) increasing 8.75% for the 12 month period.

More recently, corrections in July and early August reminded investors of how volatile markets can be. The US and European share markets were affected by the sub-prime mortgage related credit concerns in the US and other emerging share markets have more recently followed suit.

After a strong start to the year Listed Property Trusts corrected in recent months, with a -5.4% fall in the 3 months to 31 July. This has been predominantly due to concerns about interest rate increases and the high correlation between LPT’s and equity markets.

The economic outlook for the global economy is for strong growth, with GDP expected to remain at 5.2% into 2008.

In Japan, low inflation and unemployment, together with increased levels of business confidence is expected to strengthen economic growth and market performance.

Germany is once again acting as the economic engine to drive Europe ahead. Germany is surprisingly being supported in this role by a resurgent France.

Economic conditions in Australia are expected to be positive. The demand for resources from China and India shows no signs of abating and this continues to bode well for the Australian economy.

Other factors contributing to a positive economic outlook are unemployment being at its lowest level in 32 years, strong GDP growth (3.3% expected for 2008), and strong consumer confidence and government spending.

This confident environment has increased inflation above the levels that the Reserve Bank of Australia is comfortable with, necessitating the increase in official rates at their August meeting. Some market commentators expect another rate rise in early 2008 in an attempt to tame inflation.

The outlook for investment markets is mixed. The credit crisis caused by the sub-prime defaults in the US has prompted central banks in Europe and the US to inject billions of dollars into financial markets increasing liquidity and providing a defence against the possibility of a credit crunch. It may take some time to see how much further this credit crisis affects markets however further volatility is expected in the short term.
Brendan Gallagher

Brendan Gallagher

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