Property fund managers may occasionally be said to have flair. But do they have style? The trend, in both the US and Britain, towards investment in property pools instead of the ownership of individual properties, has focused attention on the performance of the fund managers who run them.
But the plethora of choices means pension funds can be choosy about where they put their money and competition is forcing managers to demonstrate that they can deliver outperformance.
"The incentive is to have an appropriate benchmark against which to measure performance," says Micolyn Yalonis, vice-president and manager of real estate at California-based investment consultants Callan & Co.
But because property investments can differ so vastly from each other, analysts have had to try to find ways to group them in order to compare like with like. Only then can meaningful benchmarks be developed, she says.
And that sparked the effort to try to classify different approaches to property investment. In equity investment, there has been the emergence of "style"in which fund managers adhere to fairly coherent criteria in selecting securities for their portfolio. Broadly, managers fall into the "value" style camp, picking securities with high dividend yields relative to share price, or into the "growth" camp where yields are lower but there are greater expectations of share price appreciation.
But for a variety of reasons, property investment styles have long resisted classification. "The differences between properties are less obvious than equities," says James Hyslop, head of property at UK fund managers PDFM, one of the few houses with a reputation for having a consistent investment style. "But properties are very different and you have to make some compromises."
Even two very similar office blocks sitting side by side may have different characteristics, depending on lease terms, financing arrangements and the mix of tenants, he notes.
William Hill, fund manager for Schroder Exempt Property Unit Trust, the largest UK fund of its type, says that "style" in a property fund manager is an emerging phenomenon. "I think there is such a thing as style and increasingly so," he says. "Ten years ago, the property market was a very unsophisticated place run on a seat-of-the-pants basis."
Schroders' own style in property - like its style in equity investment - is to offer modest, but consistent outperformance against a benchmark. "Our clients do not want a roller-coaster approach," Mr Hill says, adding that Schroders eschews heavy concentrations in high-yielding, but risky sectors.
The development of a reliable benchmark in the UK - created by the Investment Property Databank - has encouraged managers to strive for a more coherent approach to investment, he says. With the benchmark, underperformers are now called upon to explain their results or risk losing their clients.
In the US, where there are more than $120 billion in property investment trusts traded on stock exchanges, analysts have resorted to classifying managers not by the financial characteristics of the properties they buy, but by their type.
Floris van Dijkum, analyst at Morgan Stanley, points out that indices of performance have already been developed by the US National Association of Real Estate Trusts (Nareit) along these lines. The 11 categories attempt precision and include a wide variety of investments ranging from hotels to self-storage centres to regional shopping malls to healthcare facilities.
Nareit has assisted the categorisation by producing a sector index plus sub-groups of indices so that investors in these property vehicles can compare their manager against the sector average and see whether outperformance has been achieved.
But Mr van Dijkum argues that even that is not enough. "There is suburban office space and downtown office space," he points out. Both fall into the office space category but the investment characteristics of each will vary widely.
Moreover, some managers try to add value by trading their properties and contracting out the management of those buildings while others add value by managing them in-house, aiming to extract the maximum rentals.
Nigel O'Sullivan, partner at Londonbased investment consultants Bacon & Woodrow, says styles of property investment tend to vary with the type of manager in charge of the portfolio.
These fall into five broad categories: large surveyors, smaller surveyors, insurance companies, fund management companies and specialist niche players offering limited partnerships.
"This tends to characterise their style as well," he says. The managers are guided towards choices as much by their portfolio characteristics as anything else. Thus, the fund management companies offering openended unit trusts may be more frequent traders of property since they may sometimes be forced to sell assets when investors want to redeem their shares. At Callan & Co, efforts to classify managers as "value" or "growth" managers are taking shape, Ms Yalonis says, albeit slowly.
"We sent out a questionnaire to those who manage portfolios of Reits and one of the questions asked them what their style was," she says. "Most of them just skipped that question. They didn't understand it." The only managers who did respond, she says, were those working in organisations which also manage equity portfolios.
"Most managers do not invest with a style in mind," she notes. But that does not mean that styles are undefinable. "The characteristics that make an office property in Atlanta, Georgia, a value purchase also make an industrial property in Concord, California a value purchase," she says.
Callan defines a "value" portfolio as one in which at least two-thirds of the properties are high-yielding and a growth portfolio is one in which at least two-thirds are lowyielding. A balanced portfolio is one containing half of each.
Reits, which has huge tax incentives to pass rents on to their shareholders, are, by definition, value investors, Ms Yalonis says. However, even the most careful efforts to style a portfolio may come to nothing, she warns. "Real estate can change its characteristics overnight."
During the property recession in 1992, the value of portfolios in the US fell by as much as 40 per cent. "Everybody suddenly became a growth investor," she says.
