(a) Paul Theodosiou - executive director, Acucap Properties Limited:

The varying performances of the retail, office and industrial sectors over the last five years, and perhaps even more noticeably over the last two, clearly illustrates the rationale behind diversified portfolios, where the outperformance of one sector mitigates the underperformance of another to produce sustainable long-term returns as the sectoral cycles strengthen and weaken.

Beyond this, not much more can be assumed about a diversified portfolio strategy. Rather, it is the individual properties selected in assembling such a portfolio that will reveal the more specific strategy of the fund concerned, be it defensive (long-term growth), aggressive (short-term yield) or opportunistic (do what seems best at the time).

A specialised fund sacrifices the advantages of diversification, and its principal means of mitigating the risks of single sector exposure must be through careful construction of its portfolio, and by more thoughtful and astute asset selection within its chosen sector. Selecting the right assets would not only limit the risk of underperformance during a downturn in that sector, but it would also provide the opportunity to significantly outperform when the sector as a whole is doing well. It would thus be hard to imagine why a fund would consciously opt for a specialisation strategy, only to assemble an indiscriminate array of assets that would not answer the benefits of specialisation, but instead increase the volatility of returns and raise the fund’s risk profile.

So it seems that a diversified strategy can be successfully implemented without specific reference to the quality of the assets – any statement on quality would become a secondary strategy within the diversified portfolio. A specialised strategy, on the other hand, would seem to rely for its success on the quality of the portfolio, and one could therefore imply that portfolio quality is intrinsic to specialisation, but optional when pursuing a diversified strategy.

(b) Pieter Prinsloo - MD, Hyprop Investments Limited:

Specialisation or diversification can occur in any kind of property portfolio and quality is not mutually exclusive to either form. Both have advantages and disadvantages which, in certain market conditions, could establish the specific portfolio form as better, worse, or similar.

The management expertise mandated to ensure the performance of the portfolio is more critical as a defining factor.

Management’s strategic focus and expectations would obviously need to be in line with the nature of the portfolio to achieve optimum results. In this regard a diversified portfolio of properties may require a higher degree of diverse expertise and focus, across multiple sectors, compared to a more singularly focused specialised property portfolio.
 
In addition, the quality of a portfolio, as measured in terms of investment returns, is more dependent on its position of strength in relation to its market segment and the utilisation of market opportunities. While a specialised portfolio has the ability to outperform the sector average in good times, it can also substantially underperform during economic downturns. Diversified portfolios tend to follow a closer correlation with the market average throughout economic cycles.

In South Africa there is a lack of diversified portfolios of exceptional quality in the listed sector. The trend, in order to obtain critical mass, is to accumulate a wide range of different quality properties within one portfolio which can have a direct impact on the performance of the portfolio. In contrast we have a number of good quality specialised property portfolios. However, in the listed sector, specialised portfolios tend to lack critical mass and sizable specialised portfolios can only be found in institutional portfolios.
 
Ultimately a quality property portfolio under the right management will outperform its peers - irrespective of it being a diversified or a specialised portfolio.