Angus McNaughton, recently crowned managing director, property at Colonial First State Global Asset Management (CFSGAM), offers up a straightforward strategy for transacting in a difficult market – focus on what you do very well. And despite sector challenges, what CFSGAM does “very well” is retail and office.
“Our general view across both sectors is that there’s more upside potential than downside risk. I think a lot of the downside risk has been priced in by the market.”
McNaughton doesn’t believe market sentiment is drenched in negativity, but he does feel an “overly cautious” vibe is being transmitted.
“I think when you’ve got global uncertainty and lots of conflicting data coming through, both internationally and domestically, then you’re going to get that uncertainty.”
McNaughton, who took over CFSGAM following Darren Steinberg’s move to DEXUS earlier this year, manages portfolios predominantly geared towards the institutional market. And he says their investors have confidence his team will extract the maximum possible from the opportunities that currently exist in the market.
“And when the markets turn and hopefully improve, then we’ll be obviously well-positioned as well.”
Further on sentiment, McNaughton is balanced in his view on investment in the Australian markets, saying he could probably mount good arguments both for and against investment here.
“I think sometimes when we sit here and just look at what we read in the press on a daily basis, we can become overly defensive and negative about what’s happening in the markets.
“However, when you look at our data relative to what’s happening around the rest of the globe, Australia is incredibly well-positioned. There’s over $170 billion worth of resource sector projects that are underway. So those sorts of things are really going to help drive the economy.”
On the listed market, McNaughton says offshore investors are reasonably sensitive to the high Australian dollar, with CFSGAM seeing significantly more investment coming into the Australian market as the dollar starts to moderate.
“Anything above $1.05 or $1.06 [against the US dollar] and they are more cautious about coming into the Australian market.”
On the wholesale side, CFSGAM is seeing a number of offshore groups with strong interests in Australia.
“It’s a transparent, deep market – it’s easy to do business here – they see very sophisticated managers in the domestic market, and they see good core style returns that you’ll get from real estate here.”
International investors with interests across Australasia will look to Australia to reduce their overall look-through gearing, says McNaughton. It is an attractive market.
“A lot of the funds that they’ll invest into Asia will be highly leveraged and more opportunistic, and so they look to mix it up a bit with some core exposure to the Australian market and funds that have low gearing …”
“Some, if you are, say, a fund-to-funds investor and have to hedge your exposure … are looking to go slightly up the risk curve to offset some of the hedging costs.”
While CFSGAM’s eye is trained on office and retail, McNaughton gives industrial a nod as a prosperous sector for investor interest.
Hotels are also doing well, although CFSGAM is offloading its closed-in hotel fund. With its assets currently being marketed and final due diligence underway with two investors, McNaughton expects it to transact, and will not be looking to invest further in hotels.
On the retail front, McNaughton argues there is a “lot of fact and fiction” in terms of what we read about retail data.
He emphasises the need to consider Australia in a global context.
“So, for example, our listed vehicle, CFX, their sales growth for the previous six months … was 2.9 percent. If you looked around the rest of the globe, nearly 3 percent sales growth in a challenging environment would be spectacular performance. However, relative to the Australian market, we’re in more challenging times.” [Figures up to December 2011.]
McNaughton believes we are towards the bottom of the cycle on retail, and says weak retail sales may be attributed to “a very small structural piece”. That “small structural piece” relates to the internet, which McNaughton says will grow, coming from its low base.
“And that will take a small slice of sales. So those retailers that are really integrating the internet into their own strategies will be successful going forward.
“We see that consumers are still spending, however, they are diverting some of their spending to other means. Offshore travel has been significant. The high dollar has been very attractive for parties to go offshore.”
This is likely to moderate as the dollar will change, says McNaughton, who cites the availability of opportunities because of what CFSGAM sees as “a sort of cyclical downturn in the market”.
“We’re establishing a new wholesale fund that will focus on neighbourhood and sub-regional centres.”
Many investors are not waiting for recovery, adds McNaughton, and instead are seeing a great opportunity to get in towards the bottom of the market.