Henderson Horizon Global Property Equities
Fund
Managed by Henderson Global Investors
Full Rating Report
Key Rating Drivers
Active Bottom-up Stock Picking: Henderson Horizon Global Property Equities Fund, managed by Henderson Global Investors, is an active, bottom-up global real estate equity stock-picking fund that seeks to generate long-term capital appreciation.
Global Allocation, Local Autonomy: The regional asset allocation is set by the fund’s lead
portfolio manager (PM) based in London, reflecting index weights and top-down views. Henderson teams based in Asia-Pacific and Europe and a joint-venture team with Harrison Street Securities LLC in North America have autonomy in regional stock selection.
Consistent Framework, Specialised Processes: The research framework is consistent globally, seeking to forecast total stock return potential over a 12-month horizon. Specialised local investment processes, reflecting the idiosyncrasies of global real estate equity investing, are based on quantitative components analysing standard balance sheet and cash flow measures and on qualitative components considering portfolio quality and management.
Experienced PM, Empowered Teams: The fund’s lead PM, Patrick Sumner, has 33 years’ real estate investment experience and 16 years’ company tenure. Reliance on the lead PM is mitigated by the resources and expertise of the local investment teams.
Active Monitoring: The fund is actively managed globally through a monthly review of regional allocations and regionally on an ongoing basis. The fund aims to limit the number of stocks in the portfolio, with those in each regional allocation representing “best ideas”. Trading is driven by changes in return expectations or relative value ranking.
Established Asset Manager: Henderson is a listed, global asset manager with GBP70.8bn assets under management (AUM) at end-September 2013. The operational and IT environment is built around standard third-party systems providing well-controlled and efficient workflows.
Appropriate Operational Framework: The fund passes Fitch’s operational assessment (see Figure 6), with standard terms and third parties.
Good Track Record: The fund has achieved the top Lipper Leader score for consistent return over five years. The fund’s longer-term performance is in-line with the index, which is consistent with its long-term beta of approximately 1.0 and its low tracking error target.
Figure 1 0 200 400 600 800 1,000 1,200 1,400 1,600 0 50 100 150 200 S e p 0 8 A p r 0 9 No v 0 9 Ju n 1 0 Ja n 1 1 Ju l 1 1 F e b 1 2 S e p 1 2 A p r 1 3 O c t 1 3 Assets (RHS)
Henderson HF global property equities A2 USD (LHS) FTSE EPRA/NAREIT developed TR USD (LHS)
Lipper global equity sector real est global (LHS)
Fund Performance and Assets (% growth)
Source: Lipper
(USDm)
Lipper Leaders:
Consistent Return Rating
(Lux, Oct 13)
3-Year 5-year 10-Year
n.a.
For more information, see www.lipperleaders.com
Fund Features
Asset Management Company Henderson Global Investors Portfolio managers Patrick Sumner Guy Barnard Inception date January 2005 Size USD1.3bn (31October 2013) Lipper
classification
Equity Sector Real Estate Global Strategy Stock Picking Global
Real Estate Equities Reference index EPRA/NAREIT
Developed Real Estate Index Share classes Primary share class:
LU0209137388 Other share classes in USD Jurisdiction Luxembourg Source: Fitch Analysts Alastair Sewell +44 20 3530 1147 [email protected]
Richard Woodrow, CFA +44 20 3530 1388
Qualitative Assessment
Investment Process
Investment Philosophy
The investment approach is active, based on bottom-up global real estate stock selection within a defined regional allocation.
The investment philosophy aims to benefit from specific regional and local market knowledge in global property equity selection. The fund focuses on a limited investment range of largely index stocks. The process is driven by quantitative and qualitative screening criteria. The qualitative element emphasises specific real estate factors and incorporates a close interaction with, and knowledge of, company management. The fund invests globally; however, the PMs identify stock selection as the key performance driver over the regional allocation. The fund, like the index, focuses primarily on retail and office properties.
The portfolio typically contains 65-75 holdings, around 50% in North American stocks, 30% in Asia-Pacific stocks and the remaining 20% in European stocks. Within each region the fund tends to be neutral regarding individual country allocations. The different regional allocations reflect broad index weightings and are managed by specialised local teams. The fund’s annual
turnover1 to December 2011 was 117%, taking into consideration purchase and sale activity in
addition to redemption and subscription activity.
Since launch, the fund has adhered to its philosophy, as indicated by historical investment parameters and the return pattern. The collapse in global real estate markets between 2007 and 2008 negatively affected the fund’s performance in absolute terms, although its relative performance was similar to or slightly better than its Lipper category peers. The fund’s long-term beta of 1.0 and low tracking error target would suggest typical performance in-line with the index.
The fund’s investment philosophy is characterised by its local specialisation, consistent with the idiosyncrasies of global real estate equity markets.
Research
The fund’s overall investment universe is about 380 stocks, with around 140 each in North America and Asia-Pacific and around 100 in Europe, although not all are covered all the time. Fundamental stock research is performed by the local investment teams, according to a globally consistent framework but locally specific processes. Henderson teams are responsible for European and Asia-Pacific stock selection, while a joint-venture partnership with Harrison Street Securities LLC is responsible for North American stock selection. The research incorporates qualitative and quantitative components that are scored and ranked.
The quantitative element takes in standard measures for evaluating balance-sheet quality and financing risk. It also takes into account liquidity risk, driven by an estimate of days to sell a EUR10m position (in Europe) based on the trailing 30-day average trading volume. The team considers a stock small-cap if it would take more than five days to sell USD15m worth of stock (based on 100% of the average traded volume over the preceding 90 days). Henderson estimates that 97% of the portfolio could be liquidated in 10 business days.
The qualitative component incorporates an analysis of portfolio quality, which is subjective, taking into account aspects such as tenant quality, lease length, locations and individual buildings. The qualitative component also incorporates an analysis of management quality, which involves periodic meetings with management (typically once or twice a year).
1
Calculated as total of purchases and sales (absolute value) less the total of subscriptions and redemptions (absolute value) divided by the average net asset value
Figure 2
Fund Statistics
(At 31 Oct 2013, USD)
Calendar returns (%) Year Fund Reference indexa Lipper category 2013 5.0 7.9 3.7 2012 27.0 28.7 23.5 2011 -10.1 -5.8 -5.5 2010 20.3 20.4 20.1 2009 46.0 38.3 45.6 2008 -48.3 -47.7 -50.7 2007 -8.0 -7.0 -6.0 Statistics (1 year) Volatility (%) 14.1 Sharpe ratio 0.6 Max drawdown (%) -13.8 a
Reference index is EPRA/NAREIT Developed Real Estate Index Source: Lipper Figure 3 Regional Allocation As of October 2013 Source: Henderson America 47% Europe 13% Europe (inc. UK) 14% Asia-Pacific 34% Related Criteria Fund Quality Ratings Criteria (September 2011)
The rankings resulting from the qualitative and quantitative analysis are weighted according to current market conditions. An overall ranking and peer comparison results, which serves as the primary stock selection tool, in conjunction with current market pricing.
The purpose of research is to forecast the total return of each stock over the coming 12 months, based on net asset value and/or earnings projections. The research process focuses primarily on forecasting growth and dividends. Valuation is based on net asset value and earnings over one- and three-year horizons.
Formal research memos are not produced. However, notes from meetings with management are maintained and discipline is incorporated in the scoring. The fund places particular focus on PMs justifying their actions to the global team where they deviate from the ranking derived from the investment process.
Decision Making and Portfolio Construction
The global regional asset allocation is the responsibility of the lead PM (Patrick Sumner) and is updated at least monthly. The allocation is made with reference to the index, to include allocations to North America and Asia-Pacific at +/-10% of the index allocation and +/-5% to Europe. Within each region the fund can contain a maximum of 10% off-index stocks, which are typically less liquid.
The local investment teams have autonomy in decision making, within the global regional asset allocation and portfolio construction rules. Index regional allocations are closely followed in order to avoid country or foreign exchange bets in the portfolio. Interaction between the regional teams is formalised in monthly conference calls and ongoing monitoring of the regional portfolios (in the context of the global fund) by Patrick Sumner in London.
Position sizing reflects the PMs’ convictions within the global regional asset allocation framework and portfolio construction rules compared with the index. The investment team tries to limit the number of stocks in the portfolio so that each regional component represents “best ideas” only. This can result in some concentration, albeit with global diversification. A minimal cash balance is maintained to fund investments.
Entry and exit points are primarily determined by the relative valuation of the stock. Sell decisions typically reflect a reduction in the PM’s forecast total return for the stock.
Portfolio Monitoring
Front-office portfolio monitoring is based on monitoring spreadsheets linked to Charles River and to Bloomberg. These spreadsheets allow portfolio managers to analyse the portfolio according to different metrics, either on regional or globally aggregated bases.
Portfolio risk monitoring is based on daily, weekly and monthly risk reports produced independently by investment risk management from Barra, Risk Metrics and Style Research software. Through these reports, the PMs and senior management monitor the fund’s tracking error, beta, contribution to tracking error, active risk decomposition, style factor breakdown, country and market capitalisation, and illiquid stocks, among other metrics.
The risk review process intends to ensure that the portfolio is not exposed to excessive or unintended risk. Regular dialogue between the investment risk team and PMs contributes to a genuine embedding of risk-management in the investment process. Twice-weekly equity risk meetings and a monthly investment risk committee formalise the risk oversight and escalation mechanisms. The fund’s portfolio is continuously monitored against the benchmark, which serves as an anchor to monitor risk.
Liquidity risk is monitored daily through a liquidity profile of the fund, based on the time required to liquidate a position based on a third of the share's average 90 day volume. Henderson estimates that 90% of the fund be liquidated in seven days. When investing, the PM would expect to be able to sell a position within two trading days.
Figure 4 Allocation by Market Capitalisation USD, As of October 2013 Source: Henderson B/w 1 and 2bn 24% B/w 0.5 and 1bn 10% B/w 5 and 20bn 34% >20bn 23% <0.5bn 2%
Operational Front-Office Workflows
The PMs are directly in charge of the operational management of the fund. The Charles River system supports the straight-through processing of orders, which are executed by the central dealing unit. Pre-trade compliance checks are automated in Charles River. The fund does not use derivatives. Procedures allow for swift implementation of investment decisions and best execution.
Resources
StaffingPMs of the regional allocations have autonomy in portfolio management decisions, within the regional allocation prescribed by Patrick Sumner as lead PM in London. He is also responsible for indirect fund of fund management at Henderson but devotes the majorty of his time to the Global Property Equities fund. He reports to Graham Kitchen, head of Henderson’s equity business. Henderson’s global real-estate equities team consisted of 10 investment professionals at September 2013.
The Asia-Pacific real estate equities team consists of two PMs and one research analyst. Turnover of staff is relatively high in Asia and has also affected the fund in the recent past. Nonetheless, the lead Asia-Pacific PM has reasonable tenure and steps have been taken to retain staff. The Europe team consists of two PMs (including Patrick Sumner) and two analysts, while the North American team (a joint venture with Harrison Street Securities LLC) consists of four PMs. There is a good depth of experience in the team, including Patrick Sumner’s 33-year real estate investment experience. Key members of the global property equities team have long tenures. The team interacts with Henderson’s direct property investment teams through periodic meetings and the management of listed components of direct property mandates. Support functions include the investment risk management team of six and an operational risk team of four. The dealing desk consists of nine equity traders.
Technology
Overall, the IT environment is satisfactory, matching well the needs of the fund. Charles River is Henderson’s integrated “front-to-back” system. It handles pre-trade controls, trade transmission, cash management, net asset value validation and subscriptions/redemptions. Equity risk and analytics systems include Barra (factor risk analysis), Factset (performance attribution), Risk Metrics (value at risk and stress tests) and Style Research (style analysis). All risk data and analytics are centralised in an internal website, which facilitates report production.
Asset Manager
Ownership and Financial Conditions
Henderson was founded in 1934. The company has been listed on the London and Sydney stock exchanges since December 2003, following its de-merger from AMP Asset Management. The top shareholders are Perpetual Limited (11%), Henderson staff (10%) and AustraliaSuper (6%) as of June 2013. Henderson employed 1,001 people worldwide as of June 2013, of which 282 were investment professionals. Henderson’s financial condition is sound overall. The acquisition of Gartmore early in 2011 has had a positive impact on profitability.
Operating margins have steadily improved over the past year, from 35.4% at end 2012 to 38.8% in 1H13; up from 34.7% at the end of 2011. Gross debt/equity was 0.19x at end-December 2012, down from 0.37x at end-end-December 2011, mainly due to the full repayment of an outstanding note. Henderson had a net cash position at end-December 2012, compared to a net debt position at end-December 2011. Management fee margins reduced slightly in 2013, from 54.6 basis points (bp) at end-December 2012 to 54.0bp at end-June 2013, although up from 48.2bp at end-December 2010, pre-Gartmore acquisition.
Figure 5
Equity 55% Company's AUM
Breakdown by Asset Class As of September 2013 Source: Henderson Fixed income 26% Property 19% Private equity 1%
Client Base
Henderson’s clients are a good blend of institutional and retail, with a respective split of 51% and 49% as of June 2013. The UK represented around 75% of fee revenues in both 2012 and 1H13, and around 68% of AUM at 1H13. Henderson suffered outflows in 2012 of negative GBP4.0bn from a combination of retail and institutional outflows. This was, however, outweighed by positive market movements of GBP5.3bn in 2012. In 2013 to end-September, institutional outflows have continued and totalled negative GBP2.1bn. However, retail flows have turned positive, totalling GBP1.9bn.The AuM of the Global Property Equities fund has been largely unchanged over the last year. Investors in the fund are 67% institutional and 33% retail. There are no notable investor concentrations.
Institutional Experience and Market Presence
Henderson managed GBP70.8bn at end-September 2013. Henderson has been managing SICAVs since 1985 and global property equities since 1997. The fund has USD1.3bn AUM as of end October 2013.
Stability
In 2009 Henderson merged with New Star and in 2011 with Gartmore. The integration progressed according to plan.
Figure 6
Operational Assessment
Pass Attention required x Fail
Service providers and asset segregation
Custodian BNP Paribas Securities Services (A+/Stable/F1+)
Segregation of assets Assets are segregated as required by regulation
Administrator BNP Paribas Securities Services Auditors KPMG Luxembourg
Stability in service providers
Unchanged since fund inception (2005)
Others SAS70 controls report produced for BNP Paribas annually.
Regulation and governance
Regulated vehicle Luxembourg SICAV – UCITS III compliant Governance Board of directors of five, including one
independent.
Control framework Compliance: 22 people; investment risk: six; credit risk: three; operational risk: four; derivative risk: three; internal audit: six
Valuation and pricing
Pricing responsibility Undertaken by BNP Securities Services Pricing policy Priced daily at 4pm Luxembourg time;
assets are exchanged, traded and priced via usual outlets. Illiquid/unquoted stocks priced via Fair Value Committee Back-office
reconciliations
Holdings and cash are reconciled daily automatically between the manager and the administrator
Fund terms
Liquidity management Daily liquidity with T+4 settlement; about half the portfolio is invested in stocks with a market capitalisation below EUR500m that may be difficult to sell in a stressed environment. Henderson estimates that 97% of portfolio could be liquidated in ten business days
Fee structure Management fees of 1%-2%; 10% performance fee for certain share classes
Conflicts of interest
Management of conflicts of interest
Independent asset manager; no other activities than third-party investment management
Alignment of interests Presence of both short- and long-term incentive schemes, with performance-related fees and employee share schemes
Disclosure and transparency
Clear strategy representation
Eligible instruments and investment strategy clearly described in prospectus Level of disclosure Adequate level of transparency: monthly
factsheets with top holdings and
performance, accounts and prospectuses available on website
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