Las Vegas bet yields bumper result for fund

Sydney boutique fund manager PM Capital has returned almost 63 per cent over the financial year, largely through playing the recovery in Las Vegas house prices.

Sydney boutique fund manager PM Capital has returned almost 63 per cent over the financial year, largely through playing the recovery in Las Vegas house prices.

The fund manager has investments in Las Vegas property and casinos, and in mortgage lenders.

Las Vegas was at the epicentre of the worst-ever downturn in US house prices during the global financial crisis.

The manager's Absolute Performance Fund is the best-performing global share fund for the year by a big margin, with a 20 percentage-point gap on the next-best performer.

About a third of the Absolute Performance Fund's portfolio, which holds only about 20 stocks, is exposed to the recovery in US house prices, said Paul Moore, who founded the fund manager in 1998. US house prices have been recovering, particularly over the past six months, and that has proven a winner for the fund.

"Three or four years ago we said that the US housing was the centre of the financial crisis, and Las Vegas was the centre of the housing crisis," Mr Moore said.

"Sometimes you have just got to think simply," he said. "Buy in a bust and sell in a boom." Mr Moore and Ashley Pittard, the portfolio manager of the fund, travelled to Las Vegas to look at properties there.

"We had heard about the terrific yields and went to Las Vegas to follow up an idea," Mr Moore said. "You drive down four-lane highways to see these places, nice suburbs, tree- lined and pristine with access to national parks."

There were one-bedroom apartments selling for about $US50,000 on gross yields of 15 per cent. "It sounded too good to be true, but it was true this time." Then consideration was given to the best way to play the Las Vegas property recovery.

The fund bought shares in US banks with big mortgage lending books that would benefit from a housing recovery, such as Wells Fargo, Bank of America and JPMorgan.

Another stock that fitted PM Capital's investment criteria was Howard Hughes Corporation, a real estate development and management company based in Dallas, Texas, founded by reclusive billionaire Howard Hughes.

One of the company's biggest projects is Summerlin, a planned community on the outskirts of Las Vegas that houses about 100,000 people and will eventually house more than 200,000.

PM Capital's fund also took a position in MGM Resorts International, whose portfolio of gaming, hospitality and entertainment businesses includes casinos in Las Vegas.

Shares in Howard Hughes Corporation have risen to about $110 from about $60 a year ago.

Mr Moore thinks only the first stage of the recovery has been reached. "When you have a worst-ever [housing downturn], the reality is that it is not going to recover overnight."

The most recent S&P/Case-Shiller Home Price Index shows house prices are still a substantial way from the peak recorded in 2006.

From 2006 until 2008 there was a 40 per cent drop. Prices were flat until 2012, when they grew by low single digits before accelerating this year.

While Mr Moore would want to dampen expectations of another 63 per cent return for this financial year, he thinks the recovery in US house prices will continue for at least another five years, and perhaps another 10 years.

"Over the next five to 10 years we are heading back to a point where it will be 1.5 million [annual] housing starts, from about 600,000 at the trough," he said.

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