The Henderson European Property Securities Fund is an underlying fund that invests in "quoted equity securities of companies involved in the ownership, management and/or development of real estate in Europe." This was also the top performing fund at Fundsupermart for the first three quarters of 2004 (click here for a report on the best and worst performing funds for the first three quarters of this year). Even as global markets traded unevenly on a slew of concerns ranging from high oil prices to China's slowing economy, the fund continued to put in a strong performance (see table below). It clearly outstripped European funds, which on average returned under 3% for this year.

Fund manager Patrick Sumner, who was in town recently, says the fund is focused on property securities that have good operational cash flow, sustainable dividend yields, and good management. It's slanted towards commercial property companies, that derive their income from renting office space to businesses. He notes that year-to-date the property sector has produced superior returns as investors continued to demand more stable and higher yielding stocks.

ANNUALISED RETURNS* OF THE FUND AS AT 30 SEPTEMBER 2004

IS THE PERFORMANCE SUSTAINABLE?

The fund has around 40% of its holdings in the United Kingdom (see Country Allocation). For the past few years, residential property prices in the UK, especially London, have been rising, creating fears of an asset bubble. Some investors have feared that the asset class may be at a peak, making it vulnerable to a slowdown. However Sumner indicates that this is not a real risk for the fund. Firstly, the fund's UK holdings are not invested in residential holdings. Rather, the fund's preference for the UK has been supported by continued activity in London's West End office market. There have been early signs of a resurgence of demand in the key City office market, as employment figures for the UK remain relatively strong.

There have also been positive developments across the European property sector, where the fund has invested the remainder of its holdings. One major development is the rise in merger and acquisition activity, which has thrown up good investment opportunities for the fund. The fund also remains overweight in the retail sector (i.e property exposure to retail warehouses or shopping centres), to tap on continuing cosnumer expenditure in selected European markets. On a country basis, the fund is currently overweight in UK, France and Italy.

Also, Sumner states that individual property markets within Europe have a low correlation to each other. As a result, the fund offers diversification benefits, and can be considered a seperate asset class (see table below). Investors can also worry less that the fund will be adversely affected if there are property bubbles in individual markets. Sumner adds that other reasons to consider investing in a European property fund include:

• delivers high and stable yield
• it has a low correlation to other traditional asset classes such as bonds and equities
• property offers more inflation protection than bonds
• ...and even more deflation protection than equities
• supply is constrained in areas of high demand making it an an attractive investment option
• it's a suitable asset to borrow against but needs professional management
• has a wide investment universe to select from
  
  TABLE: Correlation Of European Property Markets

INVESTMENT PROCESS

The investment process combines a top-down and bottom up approach. An in-house global research and strategy team monitors developments across various markets. This team then sifts through the universe applying a set criteria for the stocks that are selected. Part of the portfolio analysis is to examine a company's income progression (the stability and growth of rental income), financial structure, and risk (in terms of lease duration, tenant risk and development exposure). The liquidity of the stock and the company's strategy cum management, are also monitored by the investment team.

The fund is made up of a core and active portfolio. The core portion has around 15-20 stocks which account for 60-75% of the fund's value. These tend to be stocks which are found in the benchmark and help ensure ample liquidity in the portfolio. The active portion is made of 10-15 non-benchmark bets, which can add a performance kicker for the fund. As part of its risk control, the fund also monitors geographic exposure, so that the fund does not become overly concentrated in one country or stock, notes the fund manager.

Top 10 Holdings (as at end September 2004)

Unibail
Land Securities
Rodamco Europe
British Land
Hammerson
Gecina
Beni Stabili
Slough Estates
Castellum
PSP

Country Allocation (as at 31 August 2004) - all figures are rounded

UK - 41.3%
France - 20.9%
Netherlands - 17.1
Sweden - 7.0%
Italy - 5.6%
Spain - 3.1
Switzerland - 1.9%
Denmark - 1.5%
Finland - 0.5%
Cash - 1.2%