Twenty years ago this month the APN Property for Income Fund (PFIF) received its very first cheque. Here, we interview the inventor and original fund manager of PFIF and founding director of the APN Funds Management business, Mr Howard Brenchley.
1. What thoughts come to mind when you reflect on this milestone and do you recall the moment when that first cheque came through the door?
My first thought is “didn’t those 20 years fly fast”. But when I think of the investment conditions of the time and the selection of Listed Property Trusts (they weren’t to be called AREITs for another decade) we had to invest in back then, it seems like ancient history.
Subscriptions then came by cheque (remember those?). In the first few months we’d take a morning walk down to the GPO to check the post box, followed by either a sprint back to open an envelope that looked like it might contain a cheque, or, more often, a slow walk up the hill on Collins Street with empty hands.
It took a while for the Fund to achieve some momentum but after three years and some strong outperformance, as well as delivering on our income strategy, it gained greater acceptance and inflows.
2. What inspired you to start the APN Funds Management business?
I had been researching property funds and property securities funds for almost a decade at my previous company, Property Investment Research. Believing I couldn’t do any worse than some of those already in the game, I decided to get out of the grandstand and onto the playing field. It was a decision I will never regret.
At the time, I thought property securities funds were being managed in the wrong way. Most commercial property investors were using the same strategies as equity fund managers, focusing on price appreciation to achieve outperformance. Income (dividends) were viewed primarily as collateral returns.
When two thirds of your total return comes from capital appreciation (as is the case with shares), this makes sense. But with property, capital appreciation accounts for only one third of total returns over the long term. Dividends are far more important.
I believed it made sense to focus on income returns and let the capital component take care of itself. From this simple concept evolved the APN investment theme of “Property for Income”.
3. Could you share one of your most memorable investing experiences?
It’s hard to recall a really memorable experience as our investment decisions followed well-structured processes. Memorable investing decisions often follow from intuitive feeling and our investment process doesn’t allow for much of that.
But an early investment in the Armstrong Jones Retail Fund does stand out. The fund had been listed following the redemption freeze on unlisted property trusts in the early 1990s. It had a portfolio of mid-sized shopping centres and we had accumulated a reasonable stake – the price was trading at considerably less than net asset backing.
Soon afterwards, due to its small size and lack of liquidity, the fund dropped out of the ASX index. This caused an increase in selling by index managers, causing the price to fall further. As they sold, we bought more.
A few months later the manager, ING, privatised the fund and our holding was bought out at a price reflecting net tangible assets per share, delivering a healthy profit. Ever since, I have believed that a good, active fund manager without index constraints, following a disciplined value approach, can outperform index funds.
4. Why the obsession with commercial property?
The three “Ls” of commercial property investing – leases, leases, leases!
Commercial property is an important element in a diversified investment portfolio. Returns from this asset class carry less volatility than equity returns (due to a high level of “certain” income) and protect investors from the vagaries of the business cycle.
Company shareholders receive dividends from earnings. Dividends are distributed once certain expenses like salaries, rent and interest have been paid and the company actually turns a profit.
Rents, being a cost to the business, are paid to a landlord regardless of profitability and well before any earnings can be distributed to shareholders. This makes them more dependable and reliable, especially as the terms of occupation are contracted under a lease.
Regardless of the profitability of the tenant company, as long as it remains solvent it is committed to paying rent to the landlord under terms of the lease. The landlord is only exposed to business or market conditions when the lease expires and a new lease must be negotiated.
The landlord of a large, diversified portfolio, might find that on average less than 20% of leases expire in any given year. That is wonderful risk management for investors seeking a steady, predictable income stream.
Recent history supports this principle. The Global Financial Crisis provoked many financial disasters, including in the REIT sector, which suffered considerable falls in value. But the total rents received by AREITs did not fall from pre-GFC levels because the underlying income from their tenants was protected by the terms of the leases.
5. There have been sweeping changes in the wealth management industry since 1998. What are the lessons you’ve learnt from 30 years’ experience in property investing?
Wherever I see significant failures in wealth management, whether from the funds management or the financial planning side of the industry, it has been a result of misplaced priorities, either deliberately or mistakenly. The current Royal Commission into the banking industry reveals that in certain cases ethical treatment of clients has come a poor second in priorities.
I believe APN has always put its investors first. One of the features of our structure is the easy interface between investors and our internal client services department, and even our fund managers. All our staff are accountable to our investors.
Ten years ago, we moved to separate boards to avoid conflict between the interests of fund investors and APN investors. The APN Board is mandated to protect the interests of shareholders while the APN Funds Management Board the interest of fund investors.
Ultimately it comes down to trust. A wealth manager that cannot generate that among its client base cannot endure.
6. Like all fund managers, APN has experienced the highs and lows of market cycles. What do you think the secret to success is for an enduring fund manager?
7. The media is awash with negative news. If you were the editor of the AFR for a day, what would be your front page headline?
I would like it to be “Collingwood wins 2018 Premiership”, but that might still be negative news for more than 70% of the readership!
More seriously, I would publish the following: “We have decided as a publication to no longer refer to ‘property’ in a generic sense. From now on, property will be described as either residential property or commercial, reflecting the polar differences between the two from an investment viewpoint.”
8. What advice would you give to a graduate entering the funds management industry today?
Keep grounded and never forget who you are working for. Your ultimate employer is your investor.
Always question; keep an open mind. Financial markets can make idiots out of the smartest investors and there is no such thing as a sure bet.
9. What’s one of the most influential book (or books) that you’ve read?
“Against the Gods: The Remarkable Story of Risk” by Peter L. Bernstein. It’s a great history of probability theory and how it pertains to risk management and even risk prediction.
10. Do you have a favourite quote, borrowed or original?
“Get the income right and the capital growth will surely follow” [me].
“In the land of the blind, the one-eyed man is king” [Erasmus].