Gaining a good working knowledge of the principles of portfolio management and asset management

Question 1

What does an Investment Manager’s role entail?

Answer 1

Entrusted to manage capital and invest in property assets deemed appropriate to achieve a specific return / benchmark, usually in form of a fund

Remit = controlled by the investment management agreement (IMA)

IMs work closely with asset managers, which may be external / internal teams that help with maximising
performance from specific assets

May have to meet specific regulatory requirements as part of the fund structure

Question 2

What is an Investment Management Agreement (IMA)?

Answer 2

Agreement for private equity fund’s appointment of an investment manager

Includes management fees, monitoring fees, scope of activities, and indemnification of the manager

Outlines the scope of permitted investments (i.e. very specialised or very broad; invest in UK / Europe retail)

Controls investment manager’s authority to invest - which can be either;

• discretionary (whereby he/she can make investment decisions)
• advisory (whereby he/she reports to the investor / client before investing)

Question 3

How are the Investment Manager’s fees structured?

Answer 3

Investors pay the IM a fee, usually annually, based on the assets under management (AUM)

Fee can vary depending on instruction, usually around 1%

IM may get an extra fee / performance fee if they meet certain milestones or benchmarks (level of performance is different from fund to fund)

Question 4

What does an Asset Manager’s role entail?

Answer 4

Work with numerous property investors / owners of property ranging from property companies, REITS, family offices and pension funds etc

Work closely with IMs to identify opportunities to generate value from properties they manage

Do so by carrying out property-specific functions such as;
o rent reviews
o altering tenant mix
o letting properties
o working with tenants

Question 5

How are the Asset Manager’s fees structured?

Answer 5

AMs charge around 1%

Some fund management companies offer investment management + asset manager services = package and combined fee can be less than the 2 individual parts

Common for asset managers to be incentivised to maximise performance on properties they manage
via performance bonus / increased fee on reaching a specific milestone / benchmark

Question 6

Why has Risk Management become more prominent in recent times?

Answer 6

Risk changes over time

More emphasis on risk management since GFC 2008

Global concerns such as the European referendum 2016 and rise in SDLT = risks

Question 7

When was the Financial Stability Board set up and why was it set up?

Answer 7

Set up in 2016

A group of G20 leaders who promote reform of international financial regulation

Issued 14 x policy recommendations in January 2017 to address structural vulnerability from asset management activities

Question 8

How can risk be managed with different asset classes?

Answer 8

Fund managers see portfolio diversification as a means of risk management

Liquidity and market risks can be managed using more liquid forms of property, such as REITs

In other asset classes, risk management tools such as futures, derivatives and options are also used

Fund managers may also use MSCI/IPD property futures contracts, which help manage liquidity and market risk alike

Question 9

What are the TWO key risks?

Answer 9

Liquidity risk

Market risk

Question 10

How might liquidity risk be managed?

Answer 10

MSCI/IPD property futures = a liquid form of exposure that can be traded daily on regulated Eurex Exchange, where buyers and sellers can transfer property risk in compliance with regulation

Funds with excessive cash holding can help to reduce cash drag on fund performance, or help manage redemptions quickly

Question 11

How might market risk be managed?

Answer 11

Tactical asset allocation can help manage portfolio weightings into certain sectors / geographical regions

New method = available: fund managers can use property futures to re-weight their portfolio to required sector / region for a fixed period, until they review the strategy

E.G. assume the fund manager wants to downweight exposure to offices and upweight to industrial. They sell the MSCI/IPD Office Index and simultaneously buy the MSCI/IPD All-Industrial Index = timely and cost-effective

Question 12

What is a key RICS GN to consider in asset / investment management?

Answer 12

Conflicts of Interest in Commercial Property Market RICS Guidance Note 2018

Question 13

If not properly identified and managed, what negative impacts can a COI have?

Answer 13

act against the public interest

damage consumer confidence

threaten the integrity of the profession and those acting within it

Question 14

What is a dual agency?

Answer 14

Where agent acts on behalf of buyer and seller

Question 15

Can you use a dual agency in light of a COI?

Answer 15

As a general rule you should not undertake dual agency

Can only take place if both contracting parties have given consent

Question 16

What happens if the buyer / seller is considered to be a company related to the agent?

Answer 16

Leads to increased risk of dual agency and a COI, therefore the agent would be unable to act for the seller / buyer

Firms must each consider whether their own business and ownership structures give rise to inherent risk of breach / COI

Question 17

When does a COI NOT arise with companies / agencies?

Answer 17

The firms are separate legal entities

There are no directors, partners or employees in common between the firms

There is no direct or indirect fee sharing between the firms

There is no access to information or common internal data sharing arrangements relating to the area of conflict.

Question 18

What are Multiple Introductions?

Answer 18

Where an agent has competing contractual relationships simultaneously with several buyers for commercial real estate investment opportunities

Question 19

What does RICS state about Multiple Introductions?

Answer 19

You should advise your new potential client of this in writing (email, letter or fax) before accepting instructions and if they are acting on an exclusive or non-exclusive basis in a commercial investment opportunity

Consent must be obtained from the client(s)

Question 20

What is Incremental Advice?

Answer 20

Where an agent is approached by another party to provide advice on e.g. building surveying, planning and valuation related to a purchase / disposal that is incremental to an existing instruction

Question 21

What are the only circumstances in which RICS members can provide incremental advice?

Answer 21

Information barriers = in place between team dealing with existing instruction and team providing incremental advice to another party

Must maintain confidentiality at all times

Where agent has exclusive instruction to purchase, informed consent must be obtained from client before providing incremental advice to another prospective buyer/s

Where the agent has a sale instruction, the client must be notified before incremental advice is provided to a prospective buyer, although informed consent is not required.