Harvard House BCI Property Fund Takes Home Raging Bull Award

We're proud to announce that Harvard House has bagged the prestigious Raging Bull Award for the Best South African Real Estate Fund on a Risk-Adjusted Basis! This award recognizes the Harvard House BCI Property Fund's outstanding performance, and we at EasyEquities couldn't be happier for them.

What makes this Fund a champion?

Here's what Harvard House has to say about their award-winning strategy:

The investment universe spans all the property-related sectors of the JSE, and which are covered by such benchmark indices as the FTSE/JSE SAPY Index, the FTSE/JSE Real Estate Investment Trusts Index and the FTSE/JSE All Property Index. Furthermore, it includes the flexibility to invest in a) selected high-yielding ordinary equities (up to a maximum of 20%), and b) collective investment schemes, which means that the Fund can invest in ETFs (such as the CoreShares S&P Global Property ETF or the Sygnia Itrix Global Property ETF) should some additional diversification be required. Typically, we only invest in property-related securities in this Fund.

Strategies and risk mitigation to protect client investments

Firstly, we are a long-only asset manager and therefore do not undertake short selling or hedging within the portfolio. In terms of risk mitigation:

1. We are not benchmark huggers at all. We are nimble and not afraid to vary widely from the benchmark to back our convictions.
2. We consider property to be a long-term building block in an income portfolio. This is due to Property’s unique ability to escalate both income and capital over the longer period despite medium to shorter-term bouts of volatility driven by sentiment or interest rate moves. Our investment philosophy looks to protect this increasing stream with every lever available to us whether it be shifting geographies (foreign versus local), portfolio (office vs retail vs warehousing & logistics) or business model (large regional malls, township malls or unique rental stream), as examples.
3. Our low expense ratio is specifically designed to make the income more meaningful and sustainable, given that income is an important component of the total return.

Our investment philosophy is anchored around the importance of generating an income from your investments, and for that income to grow from year to year. That is the framework against which we build the portfolio. 2020 was an exceptional year in which investment income came under severe pressure from COVID, especially in the listed property sector. Having declined from 6.29c per unit in 2019 to 4.22c per unit in 2020, our immediate goal was to ensure the recovery of the Fund’s income distributions. In that regard, it was pleasing to note that total distributions for 2021 were 5.03c per unit, and this recovery continued into 2022 and 2023, with a total distribution of 5.2c and 5.3c respectively. The Fund is on track to accelerate its distribution growth this year. We anticipate growth of between 6% and 10% for 2024.

This is the core metric against which we measure the Fund, and hence we scrutinise each holding in the Fund for its ability to not only pay a distribution to shareholders, but also for the ability of that distribution to grow over time. That in turn relies in the quality and positioning of the assets within each of our investments.

In addition to the above chart that shows actual income distributions, the chart below shows the growth of distributions relative to the SAPY Index and the Satrix Property ETF. The data is rebased to the inception of our Fund in November 2016. It is well known that distributions have come under pressure, due to the factors mentioned above. However, it is pleasing to note that income distributions from the Harvard House BCI Property Fund have held up far better than for the SAPY Index as a whole. We believe this is one of the key reasons behind our relative outperformance.

Expectations for the property sector

We believe the property sector offers compelling value, but interest rates need to peak both globally and locally before this value can be realised. It is worthwhile noting that after coming under severe pressure in Q3 2023, the SAPY Index has rallied by 25% since on the back of strength in local bond yields and bullish sentiment over the path of US interest rates. That highlights the potential on offer from the sector when macro conditions finally turn more favourable.

In addition, we believe that the combination of reduced loadshedding and lower US interest rates in 2024 provides a potential tailwind for local investors. Both can cause the Rand to strengthen, inflation to drop and therefore our interest rates to decline. That will be a material tailwind to the sector, not to mention the margin recovery from lower diesel costs and better tenant recoveries.

We are also encouraged by the gradual improvement in core operating metrics – such as vacancies and rental reversions – the benefit of which will be felt in combination will falling interest rates.

Winning the award – what it means?

Our investment philosophy at Harvard House Investment Management is centered around income, and the importance thereof, rather than focusing on total return. We believe that investors who invest in the listed property sector do so to earn an income as well as to achieve modest capital growth over time. Nonetheless, regular income distributions are what pay the grocery bills, not capital growth (unless you sell the investment). Consequently, our daily focus is not about total return, but rather about how we protect and grow the income.

The Raging Bull Award, however, is based on total return. In essence, we believe that winning this award vindicates our investment philosophy and gives our investors comfort that they can rely on this Fund to deliver a consistent, and growing, income stream.