The team’s quantitative work is the starting point in the investment process. The team studies regional price data from the last 17 years to find the locations that have a statistically reliable correlation to the market as a whole. This data set is then used to determine the most suitable acquisitions, by both property type and value, to produce an appropriately weighted and distributed model portfolio of property assets. This model portfolio closely matches the characteristics of the LSL Acadata house price index and guides the team’s first pass at asset selection, identifying locations that have a track record of consistent capital growth and highlighting others that have consistently fared poorly.
This work also helps to set targets for the overall portfolio, ensuring that the Fund is not overexposed to regional price variations. The model output is updated on a monthly basis and reviewed by both the Fund manager and assistant Fund manager.
Hearthstone uses this approach at a macro level because it does not believe that chasing “hot” property regions is beneficial to investors in a physical property market where transaction costs are 4-5%.