B&I Capital

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Assets are important, but quality of management is what truly creates and destroys long-term value

values

Investment success ultimately comes down to the quality of REIT senior management, according to Christian Bernasconi, Managing Director and Fund Manager at B&I Capital, the global REIT asset manager and one of the European Public Real Estate Association’s newest member.

“Quality of assets is a consideration,” says Bernasconi. “Geography can be important too. Sometimes in constrained markets like US coastal cities, there are good assets in good locations. And if the management is strong, you are sitting on a gold mine. But this combination is rare, and management and their growth strategy tend to be the decisive factor.”

As a result, the firm’s investment philosophy is firmly rooted in identifying high-quality management because of the belief that it is executive teams that create or destroy value.

“We have seen real estate companies that have the best assets but have destroyed value because of undisciplined investments,” Bernasconi says. “It is the management that is responsible for raising equity inappropriately, making bad acquisitions or lacking strategic focus. So corporate governance underpins everything we invest in because it is this factor that often creates value at the asset and capital market level.”

And so, the team makes sure it is actively involved in property tours and management meetings, accessing hundreds of management teams every year in order to truly understand the value of an investment. B&I Capital reportedly has between 400 and 500 management meetings a year in Asia alone.

And the formula seems to be working. B&I Capital has had considerable success since its inception in 2007, both on a total return and inflow basis. Back then, the business was a three-person operation, investing just over USD 30 million in Asian REITs, most of which belonged to one institutional investor that simply did not have the in-house capability to manage REIT markets.

The Asian REIT market was unsophisticated at that time, and while only a small amount of investment capital, the venture was innovative and proved a success.

“The REIT investment universe was small in Asia when we started,” says Bernasconi. “Nobody was focusing on REITs because the universe didn’t offer liquidity or much diversification. It is possible we were one of the only REIT funds in the market at the time. It was a unique proposition.”

By the end of 2007 B&I Capita had secured a further USD 70 million of investment capital and has since seen phenomenal growth.

The business, which Bernasconi set up with founding partner Charles Isaac, now manages four funds and three institutional mandates, with more than USD 1.2 billion in assets under management. Growth and consistent inflows have been a constant. Bernasconi believes much of this is due to the pair’s unconstrained, bottom-up investment style and its equally weighted portfolio, which allows all positions to contribute to the fund’s performance rather than just larger names.

Bernasconi and Isaac both have institutional investment backgrounds, working at UBS and Swisscanto Invest and observed first-hand the limitations to delivering outperformance when funds were managed with limited ‘active share’. Bernasconi believes the flexible investment strategy that B&I Capital put in place provides investors with a different investment proposition to their larger competitors and has led to their funds’ impressive outperformance over the years.

“We are smaller than our competitors,” says Bernasconi. “As a result, we have the ability to remain unconstrained by subsector or geography. We are active managers and index agnostic, and it is our active stock selection that has generated approximately 90% of our outperformance.”

Bernasconi admits that “good active stock-picking is hard to do”, but the returns have been positive and, as a result, B&I Capital’s Global and Asian funds have an extremely high active share – both over 80% of the portfolio. “We don’t start the process by saying we want 80% active share in our portfolios; this isn’t a benchmark that we strive for. For the most part, we pick a lot of stocks that are mid-sized and allow for significant growth and, as a result, we deviate significantly from any index,” according to Bernasconi.

Often, stocks have such low market capitalisation that they are not part of an index and, as a result, experience tremendous growth through acquisitions, which ultimately leads to index inclusion and subsequent improvements in liquidity.

For B&I Capital’s competitors, which tend to be teams within much larger institutional investors, there is no option to invest in businesses at such an early stage. “The risk of underperformance is too great for the property investors in the bigger organisations. Their bosses simply will not allow that sort of exposure, and so we have an almost unparalleled opportunity in the growth market,” says Bernasconi.

To ensure that best stock-picking practices, B&I Capital employs a very casual but deliberate peer review system; one which the entire company looks forward to every week – the global Friday conference call. Bernasconi says that this is an open forum to discuss ideas, sense-check strategies and learn from one another to ensure that the best decisions are taken. He describes the team as experienced, which he concedes is “a euphemism for quite old”, but he insists it does not lack diversity and opinion.

Through a robust investment process that focuses on management, checked by a collaborative peer review system, B&I Capital seeks to ensure that it provides investors with value beyond simply active betting on stocks. “We have conviction in our investments,” says Bernasconi. “We are a small team, hold each other to account and we want to be part of the dialogue promoting best practices in investing. This is what makes this team so special.”

EPRA Industry Magazine Article