Q+A: Pengana’s Amy Pham on how she built the country’s best performing property securities fund
The veteran stock picker discusses the key strategies behind the success of her fund.
Amy Pham was among the first property securities fund managers to incorporate sustainability into commercial property valuations.
It’s proven to be a highly successful strategy for the veteran stock picker. Pham’s Pengana High Conviction Property Securities Fund has consistently beaten the A-REIT index since its inception in March 2020, delivering 11.3% returns (net of fees) per year versus the index’s 7.1%.
“If a stock has poor ESG ratings, it makes it very, very hard for it to make it into our portfolio,” Pham told Green Street News.
The stellar success of her fund was recognised by the 2025 Australian Wealth Management Awards, which named her the country’s best property fund manager.
ESG is one of three pillars of the Pengana fund’s investment approach. The two others are its high conviction nature – meaning it can invest in stocks based on their intrinsic valuation rather than due to their size or benchmark weighting on the index – and its focus on alternative assets, which make up around 20% of its portfolio.
Pham, who has forged a 30-year career as a property securities fund manager, including for the likes of Charter Hall, Folkestone, IAG and Deutsche Bank, explains how these three elements come together to deliver bumper returns – without higher risk.
How big is the Pengana High Conviction Property Securities Fund, and how has it performed?
It’s relatively small, still under $30m. Recently we have won a few mandates, and we are starting to see that money flow through. We will probably get to over $50m very quickly. We started the fund five years ago, just before Covid.
It been a great learning experience for me. The fund has shown top quartile performance. It ranked No. 1 or 2 in most periods and has generated alpha [or beaten the market] by over 4% since inception per year.
How has the fund been able to outperform the A-REIT index since 2020?
Our focus is always on the quality of management, [the level] of free cash flow and having a strong balance sheet.
When we value these properties or companies, we always look at the amount of free cashflow. Funds from operations [the equivalent of operating earnings] does not count, especially for office buildings, where there is a 40% incentive.
When you look at these assets on an FFO basis, they’re still generating earnings of 3% to 4%.
But when you look at adjusted FFO, which is cash flow adjusted for any incentives, for every $1 earned, you may only be getting 60c. So, that’s why for last three to four years, the fund has not held any pure office REITs. They don’t stack up on a free cash flow basis. Even though a lot of them are trading at 40% discount to book value, we can’t invest in them because of the valuation on a free cash flow basis. We have a very disciplined process, which has been proven to work.
Who invests in your fund?
It’s mainly retail investors. We don’t have wholesale investors. I would love to win some wholesale investor mandates … [but] these days a lot of industry funds have inhouse capabilities, so it’s very difficult to land one. Also, the fees earned are very low. … We’d rather do the small retail mandates, the mums and dads and the big financial advisors who support us, and we get much better fees out of that.
Can you explain what makes the fund different to others?
We are a high conviction fund. That means we are benchmark unaware, so some big stocks we don’t hold because they don’t rate well in our valuations. For stocks outside the index, the maximum weight we can hold is 5% due to liquidity reasons.
Because we are high conviction, we do all the work ourselves. We have 52 financial models for all the stocks in our investible universe. The team and I spend 60% of our time meeting with REIT managers, going out and looking at assets, talking to industry people to make sure all that we feed into the models is correct.
So, we don’t rely on consensus numbers. We do have access to all of the major research houses and all of their research, but it just acts as a cross check. So, we don’t rely on the brokers’ recommendations.
“Having little exposure to unethical sectors like fossil fuels is good for the environment and its good for long-term financial health”
You allocate around 20% to alternatives, while the index is around 7%. Why are they so important to your fund composition?
Our other [investment] pillar is alternative assets like data centres, retirement living, childcare, healthcare, self-storage. The reason why we like and hold that sector is it gives us greater diversification outside of your office, retail and industrial [core sectors], and because these alternative assets are driven by secular [or long-term] trends such as an ageing population and the internet of things. [As a result] the earnings are a lot more stable.
These are not new assets. They have been operating for a long time but are really fragmented [in terms of ownership] and not held by institutional investors. So, it’s very hard to get access to a big portfolio at scale. But investing in a REIT [or a listed property stock] gives you access to that.
A good example is data centres. It can cost more than $1bn to build one, so for retail investors, it’s very hard to get access. But if you hold NextDC shares, you have access to not just data centres in Melbourne, Sydney and Brisbane, but also exposure to data centres in Kuala Lumpur, Japan and across Asia. That [kind of portfolio] is very hard to replicate, and you’re getting exposure to growth of more than 40%, Another example is land lease – stocks like GemLife and Ingenia. This is a sector which serves two structural drivers: the housing crisis, and the need to provide affordable housing to retirees. Not everyone can afford to live in very expensive retirement estates, where you have to put down more than $1m to buy. And we have an ageing population, so the growth is phenomenal.
How does ESG fit into your stock selections for the fund?
Our third [investment] pillar is ESG. Unlike a lot of our competitors who say they consider ESG factors, we actually incorporate ESG directly into our valuations. It makes up 30% of our valuations. If a stock has poor ESG ratings, it makes it very, very hard for it to make it into our portfolio.
We view ESG as a risk management tool for us, it is future proofing the assets. When I set up the fund five years ago, there was not a lot of focus on ESG. Now even small stocks, when they give out financial results, they have one to two slides on it in their presentations because it impacts the performance of their assets. Look at the Sydney office market. Buildings with a high Nabers rating have vacancy of 6% versus the [overall] market which is at 15%. A high Nabers rating means a building is much more energy efficient, so it retains tenants. And the tenant saves on outgoings. Therefore, it benefits both sides.
The social component [is important too]. Having little exposure to unethical sectors like fossil fuels is good for the environment and its good for long-term financial health. What we find also is that a lot of high-net-worth individuals, not- for-profits and family offices who are big investors into our fund are very focused on sustainability and the environment. They want to invest in something that makes a difference, that does not harm the environment and is aligned with their beliefs.
Governance is key. The board needs to be equally split between independent directors and normal directors. You have got to be able to trust that the company is doing the right things by shareholders, otherwise we won’t invest in them. The level of disclosure is extremely important.
What is the outlook for A-REITs?
Now is a great time to invest in REITs. I have been saying that for the last three years, but it’s true even more so now. For the last three years, we have had rising rates, very anemic earnings growth, high inflation, high construction and debt costs. Now rates have stabilised and peaked. We’ve already had three rate cuts, and we will have another two by the end of the year.
Valuations have bottomed out, and going forward, valuations should pick up from here. So, for the first time in five years, you are getting to see decent earnings growth. Since Covid, earnings per share growth has been 1% to 2%, if that, after you account for all costs. This year, average EPS growth for the whole sector is 7% and the total return is above 10%, which is pretty good.
Compare that with what equities are giving you – and with a lot higher risk.
And how does that compare with Global REITs or G-REITs?
Since the [global financial crisis], a lot of investors have invested in G-REITs, because they think of Australia as being so highly concentrated and that there are better return if they invest in G-REITs because there are more than 200 stocks. But despite the diversification, returns of the past 15 years show A- REITS have dramatically outperformed.
Why? One, because the quality of assets in A-REITS is much higher, and two, the yield on average for A-REITs is about 6% while for G-REITs the yield is only about 4% and most people invest in REITs for yield.
A-REITs are also much lower geared at an average of 27% versus G-REITs at 45%. There’s less geopolitical risk; Australia is a safe haven and you don’t have to deal with currency risk. There’s lot of value in A-REITs compared with G- REITs.
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