Aberdeen International Real Estate Equity Fund (Institutional Class shares net of fees) returned 1.41% for the third quarter of 2019, outperforming the -0.41% return of its benchmark, the FTSE EPRA/NAREIT Global ex-US Real Estate Index.
Overall, country allocation and stock selection both contributed to the Fund’s performance relative to the benchmark for the quarter. The largest contributor to Fund performance at the country level was Japan, where stock selection among the Japanese real estate investment trusts (REITs) was beneficial. In particular, the Fund benefited from its bias to the office, residential and logistics sectors, all of which experienced attractive levels of rental growth. Canada also showed strong performance, largely driven by Dream Global, which received a takeover bid from Blackstone. Finally, the Fund’s exposure to data-center REITs was additive for performance. Among individual holdings, the largest contributors included an underweight position in Sun Hung Kai and overweight positions in LaSalle Logiport and Dream Global. Sun Hung Kai saw negative share price performance as a result of the ongoing protests in Hong Kong, which has led to concerns about the future of the territory as a key Asian business hub, with commensurate implications for property markets. Shares of Lasalle Logiport rallied as the market priced in higher growth expectations on the back of the company’s recent capital raise and asset acquisitions that once again showed opportunism and acquisition discipline. Finally, Dream Global was the recipient of bid interest, as noted above.
On the downside, the main detractors from the Fund’s relative performance at a country level were the underweight positions in Switzerland and Australia, coupled with an overweight position in Brazil. Swiss stocks performed strongly on the back of safe-haven buying as the European Central Bank (ECB) moved to an easing bias, causing further appreciation in the Swiss Franc. The Fund’s lack of exposure to Switzerland was, therefore, a negative for its relative results.
The underperformance in Australia was largely driven by the Fund’s holding in Dexus, whose shares declined during the third quarter following the strong year-to-date performance. This pullback reflects a cooling of market sentiment over the Sydney office market and, in our view, brings the share price back to attractive valuations relative to its sector. The company’s fundamentals also remain robust, with low vacancies and mid-high single-digit effective rent growth. The negative contribution in Brazil was mainly driven by the Fund’s holding in MRV Engenharia after the company announced an intention to acquire the founder’s U.S. housebuilding business. This raised questions over corporate governance and strategy at the company. Among individual holdings, the most significant detractors from performance were the Fund’s holdings in Hong Kong developers CK Asset Holdings and New World Development, both of which sold off on the ongoing protests. However, the negative impact was entirely offset by the Fund’s underweight position in Hong Kong, such that the Hong Kong developers overall made a marginal positive contribution to performance. Times China Holdings also detracted from the Fund’s return for the quarter, as the stock underperformed after a period of strong results earlier in the year.
The performance quoted represents past performance, which does not guarantee future results. Class A shares have a 0.25% 12b-1 fee. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The current performance of the Fund may be lower or higher than the performance quoted.
The Financial Times Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts (FTSE EPRA/NAREIT) Global-ex US Real Estate Index is an unmanaged index considered representative of real estate companies and REITs outside the US. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Index performance is not an indication of the performance of the Fund itself.
Fund activity
Over the quarter, the Fund made several changes to stock selection across the regions, but relatively few changes to country allocation. In Japan, we exited the Fund’s position in Tokyu REIT after the stock performed well, and initiated a holing in Japan Rental Housing Investments. We also established a new position in Hulic, a Japanese property developer for which investors’ concerns about the sustainability of trading profits had caused the stock to sell off to what we felt were attractive valuation levels. Following a strong performance on the back of half-year 2019 results, we sold part of this position to capture profits.
We increased the Fund’s exposure to China by adding to existing positions in Sunac and China Overseas Land and Investments. We also initiated a position in Logan Property to take advantage of what we viewed as attractive valuations in the country where performance remains volatile and heavily impacted by changes in investor sentiment around ongoing trade negotiations with the U.S. We reduced the Fund’s exposure to Link REIT to increase the underweight to Hong Kong in recognition of the negative economic impact of ongoing protests. Elsewhere, in Australia, we reduced the position in Goodman to take profits in advance of the stock’s expected exclusion from the FTSE EPRA indices and added a new position in GPT with the proceeds.
In Europe, we exited the Fund’s position in Green REIT after the conclusion of the company’s sales process was announced. We eliminated our position in TLG after the company announced its intention to seek a merger with Aroundtown, raising fundamental questions over strategy and governance. The Fund also exited its position in Unibail Rodamco Westfield given a growing conviction that the company’s disposal program will be insufficient to change equity market views around the strength of the company’s balance sheet. We reinvested the proceeds in a new holding in Klepierre, a European retail peer with a stronger balance sheet. We also initiated a position in Catena, a property company specializing in the industrials market in Sweden, while reducing the position in UNITE Group to take profits after a run of strong share-price performance.
Finally, in Latin America, we exited the Fund’s remaining position in MRV Engenharia in recognition of a stretched valuation, alongside our governance and strategy concerns after the company announced its intention to acquire a U.S. business from the founders. We also reduced the Fund’s position in BR Malls to capture profits after a strong run in the shares, driven by progress on pension reform, which improved the market sentiment towards the Brazilian market.
Market review
The third quarter of the year was another relatively muted period of performance for the market as it digested worries over the weakening global economy and moves by central banks to restart monetary easing. The global real estate securities market, as measured by the FTSE EPRA/NAREIT Global ex-US Index, returned -0.41% and underperformed the 0.10% return of global equities, as measured by the MSCI All Country (AC) World Index,3 during the third quarter. Growing worries over trade and potential for the industrial economy to contract caused the emerging markets to underperform, led by South Africa and South-East Asia. Developed markets showed greater resilience, with positive share price performance for most regions.
Continental Europe enjoyed a positive quarter, making it one of the strongest performing markets over the period. Strong returns in Scandinavia and Switzerland were partially due to the ECB’s move to cut interest rates further and re-start quantitative easing. German residential stocks also saw positive returns, as the rent freeze proposals in Berlin, were slightly less aggressive than anticipated. However, they remain adverse and potentially unconstitutional. German commercial stocks lagged as the market reacted negatively to the proposed combination of TLG and Aroundtown, while the retail REITs lagged the European peers after half-year results showed further evidence of yield expansion weighing on capital values. The impact was far more acute in the U.K., where meaningful capital value declines for the retail REITs counterbalanced continuing strength in the industrial and alternatives REITs causing the U.K. to once again lag the majority of developed markets.
Performance in the APAC markets was mixed to down, where Japan was the market that saw positive share-price performance over the quarter. Singapore and Australia posted negative returns as their respective REIT markets pulled back from a rebound in bond yields late in the quarter. The Singapore REIT market also saw a number of new equity issuances and an initial public offering (IPO) which may have resulted in outflows from benchmark stocks. In Australia, two of the largest stocks in the benchmark experienced negative share-price catalysts: Goodman Group sold off disproportionately in August as investors were concerned that the stock could possibly be removed from the benchmark, and shares of Dexus declined as the market sentiment cooled on the Sydney office market. All stocks in Hong Kong fell dramatically in the quarter, as the government’s attempt to pass the Extradition Bill evolved into crippling, mass civil disobedience across the entire city. The negative economic impact is spreading with trade, retail sales and inbound tourism are hitting record levels of negative growth on a year-over-year basis. The likelihood of a recession appears to be fairly high and rising. Japanese REITs were the big outperformers for the quarter, as investors began to recognize the sector’s appeal, particularly their laggard status on a year-to-date basis. Rising share prices also suggest an increased potential for growth via equity raising and acquisitions, which increases total return expectations.
In the Americas region, performance for the U.S. and Canada was strong, buoyed by the Federal Reserve’s moves in favor of additional rate cuts. Data centers were among the stronger sectors in the U.S., buoyed by merger and acquisition (M&A) rumors for the smaller REITs in the sector. In Latin America, Mexico saw a strong performance, also buoyed by rate cuts and prospects of the United States-Mexico-Canada Agreement (USCMA) being completed within the year. There have also been transactions in the market for physical real estate that highlighted the value implied in the listing real estate stocks. Brazil was weaker as stocks pulled back from stretched valuations after the strong outperformance in the first half of 2019 as progress on pension reform raised optimism around the potential for economic recovery and further reform.
The Fund is subject to concentration risk, meaning the Fund may concentrate portfolio assets in companies within the same or related industry. Therefore, the Fund is more exposed to volatility within that industry than a fund that was not concentrated.
Investments in real estate securities may involve greater risk and volatility including greater exposure to economic downturns and changes in real estate values, rents, property taxes, interest rates, tax, and other laws. A REIT’s share price may decline because of adverse developments affecting the real estate industry.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and currency exchange rate, political and economic risks. Fluctuations in currency exchange rates may impact a fund’s returns more greatly to the extent the fund does not hedge currency exposure or hedging techniques are unsuccessful. These risks are enhanced in emerging markets countries.
Equity securities of micro-, small and mid-cap companies carry greater risk, and more volatility than equity securities of larger, more established companies.
The Fund may invest in Illiquid securities which involve the risk that the securities will not be able to be sold at the time or prices desired by the fund, particularly during times of market turmoil.
Investing in mutual funds involves risk, including possible loss of principal. There is no assurance that the investment objective of any fund will be achieved. Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, as well as political and economic risks. These risks are enhanced in emerging markets countries. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
Commentary contained within this document is for informational purposes only and is not intended as an offer or recommendation with respect to the purchase or sale of any security, option, future or other derivatives in such securities. Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy, and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
Overall, country allocation and stock selection both contributed to the Fund’s performance relative to the benchmark for the quarter. The largest contributor to Fund performance at the country level was Japan, where stock selection among the Japanese real estate investment trusts (REITs) was beneficial. In particular, the Fund benefited from its bias to the office, residential and logistics sectors, all of which experienced attractive levels of rental growth. Canada also showed strong performance, largely driven by Dream Global, which received a takeover bid from Blackstone. Finally, the Fund’s exposure to data-center REITs was additive for performance. Among individual holdings, the largest contributors included an underweight position in Sun Hung Kai and overweight positions in LaSalle Logiport and Dream Global. Sun Hung Kai saw negative share price performance as a result of the ongoing protests in Hong Kong, which has led to concerns about the future of the territory as a key Asian business hub, with commensurate implications for property markets. Shares of Lasalle Logiport rallied as the market priced in higher growth expectations on the back of the company’s recent capital raise and asset acquisitions that once again showed opportunism and acquisition discipline. Finally, Dream Global was the recipient of bid interest, as noted above.
On the downside, the main detractors from the Fund’s relative performance at a country level were the underweight positions in Switzerland and Australia, coupled with an overweight position in Brazil. Swiss stocks performed strongly on the back of safe-haven buying as the European Central Bank (ECB) moved to an easing bias, causing further appreciation in the Swiss Franc. The Fund’s lack of exposure to Switzerland was, therefore, a negative for its relative results.
The underperformance in Australia was largely driven by the Fund’s holding in Dexus, whose shares declined during the third quarter following the strong year-to-date performance. This pullback reflects a cooling of market sentiment over the Sydney office market and, in our view, brings the share price back to attractive valuations relative to its sector. The company’s fundamentals also remain robust, with low vacancies and mid-high single-digit effective rent growth. The negative contribution in Brazil was mainly driven by the Fund’s holding in MRV Engenharia after the company announced an intention to acquire the founder’s U.S. housebuilding business. This raised questions over corporate governance and strategy at the company. Among individual holdings, the most significant detractors from performance were the Fund’s holdings in Hong Kong developers CK Asset Holdings and New World Development, both of which sold off on the ongoing protests. However, the negative impact was entirely offset by the Fund’s underweight position in Hong Kong, such that the Hong Kong developers overall made a marginal positive contribution to performance. Times China Holdings also detracted from the Fund’s return for the quarter, as the stock underperformed after a period of strong results earlier in the year.
The performance quoted represents past performance, which does not guarantee future results. Class A shares have a 0.25% 12b-1 fee. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The current performance of the Fund may be lower or higher than the performance quoted.
The Financial Times Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts (FTSE EPRA/NAREIT) Global-ex US Real Estate Index is an unmanaged index considered representative of real estate companies and REITs outside the US. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Index performance is not an indication of the performance of the Fund itself.
Fund activity
Over the quarter, the Fund made several changes to stock selection across the regions, but relatively few changes to country allocation. In Japan, we exited the Fund’s position in Tokyu REIT after the stock performed well, and initiated a holing in Japan Rental Housing Investments. We also established a new position in Hulic, a Japanese property developer for which investors’ concerns about the sustainability of trading profits had caused the stock to sell off to what we felt were attractive valuation levels. Following a strong performance on the back of half-year 2019 results, we sold part of this position to capture profits.
We increased the Fund’s exposure to China by adding to existing positions in Sunac and China Overseas Land and Investments. We also initiated a position in Logan Property to take advantage of what we viewed as attractive valuations in the country where performance remains volatile and heavily impacted by changes in investor sentiment around ongoing trade negotiations with the U.S. We reduced the Fund’s exposure to Link REIT to increase the underweight to Hong Kong in recognition of the negative economic impact of ongoing protests. Elsewhere, in Australia, we reduced the position in Goodman to take profits in advance of the stock’s expected exclusion from the FTSE EPRA indices and added a new position in GPT with the proceeds.
In Europe, we exited the Fund’s position in Green REIT after the conclusion of the company’s sales process was announced. We eliminated our position in TLG after the company announced its intention to seek a merger with Aroundtown, raising fundamental questions over strategy and governance. The Fund also exited its position in Unibail Rodamco Westfield given a growing conviction that the company’s disposal program will be insufficient to change equity market views around the strength of the company’s balance sheet. We reinvested the proceeds in a new holding in Klepierre, a European retail peer with a stronger balance sheet. We also initiated a position in Catena, a property company specializing in the industrials market in Sweden, while reducing the position in UNITE Group to take profits after a run of strong share-price performance.
Finally, in Latin America, we exited the Fund’s remaining position in MRV Engenharia in recognition of a stretched valuation, alongside our governance and strategy concerns after the company announced its intention to acquire a U.S. business from the founders. We also reduced the Fund’s position in BR Malls to capture profits after a strong run in the shares, driven by progress on pension reform, which improved the market sentiment towards the Brazilian market.
Market review
The third quarter of the year was another relatively muted period of performance for the market as it digested worries over the weakening global economy and moves by central banks to restart monetary easing. The global real estate securities market, as measured by the FTSE EPRA/NAREIT Global ex-US Index, returned -0.41% and underperformed the 0.10% return of global equities, as measured by the MSCI All Country (AC) World Index,3 during the third quarter. Growing worries over trade and potential for the industrial economy to contract caused the emerging markets to underperform, led by South Africa and South-East Asia. Developed markets showed greater resilience, with positive share price performance for most regions.
Continental Europe enjoyed a positive quarter, making it one of the strongest performing markets over the period. Strong returns in Scandinavia and Switzerland were partially due to the ECB’s move to cut interest rates further and re-start quantitative easing. German residential stocks also saw positive returns, as the rent freeze proposals in Berlin, were slightly less aggressive than anticipated. However, they remain adverse and potentially unconstitutional. German commercial stocks lagged as the market reacted negatively to the proposed combination of TLG and Aroundtown, while the retail REITs lagged the European peers after half-year results showed further evidence of yield expansion weighing on capital values. The impact was far more acute in the U.K., where meaningful capital value declines for the retail REITs counterbalanced continuing strength in the industrial and alternatives REITs causing the U.K. to once again lag the majority of developed markets.
Performance in the APAC markets was mixed to down, where Japan was the market that saw positive share-price performance over the quarter. Singapore and Australia posted negative returns as their respective REIT markets pulled back from a rebound in bond yields late in the quarter. The Singapore REIT market also saw a number of new equity issuances and an initial public offering (IPO) which may have resulted in outflows from benchmark stocks. In Australia, two of the largest stocks in the benchmark experienced negative share-price catalysts: Goodman Group sold off disproportionately in August as investors were concerned that the stock could possibly be removed from the benchmark, and shares of Dexus declined as the market sentiment cooled on the Sydney office market. All stocks in Hong Kong fell dramatically in the quarter, as the government’s attempt to pass the Extradition Bill evolved into crippling, mass civil disobedience across the entire city. The negative economic impact is spreading with trade, retail sales and inbound tourism are hitting record levels of negative growth on a year-over-year basis. The likelihood of a recession appears to be fairly high and rising. Japanese REITs were the big outperformers for the quarter, as investors began to recognize the sector’s appeal, particularly their laggard status on a year-to-date basis. Rising share prices also suggest an increased potential for growth via equity raising and acquisitions, which increases total return expectations.
In the Americas region, performance for the U.S. and Canada was strong, buoyed by the Federal Reserve’s moves in favor of additional rate cuts. Data centers were among the stronger sectors in the U.S., buoyed by merger and acquisition (M&A) rumors for the smaller REITs in the sector. In Latin America, Mexico saw a strong performance, also buoyed by rate cuts and prospects of the United States-Mexico-Canada Agreement (USCMA) being completed within the year. There have also been transactions in the market for physical real estate that highlighted the value implied in the listing real estate stocks. Brazil was weaker as stocks pulled back from stretched valuations after the strong outperformance in the first half of 2019 as progress on pension reform raised optimism around the potential for economic recovery and further reform.
The Fund is subject to concentration risk, meaning the Fund may concentrate portfolio assets in companies within the same or related industry. Therefore, the Fund is more exposed to volatility within that industry than a fund that was not concentrated.
Investments in real estate securities may involve greater risk and volatility including greater exposure to economic downturns and changes in real estate values, rents, property taxes, interest rates, tax, and other laws. A REIT’s share price may decline because of adverse developments affecting the real estate industry.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and currency exchange rate, political and economic risks. Fluctuations in currency exchange rates may impact a fund’s returns more greatly to the extent the fund does not hedge currency exposure or hedging techniques are unsuccessful. These risks are enhanced in emerging markets countries.
Equity securities of micro-, small and mid-cap companies carry greater risk, and more volatility than equity securities of larger, more established companies.
The Fund may invest in Illiquid securities which involve the risk that the securities will not be able to be sold at the time or prices desired by the fund, particularly during times of market turmoil.
Investing in mutual funds involves risk, including possible loss of principal. There is no assurance that the investment objective of any fund will be achieved. Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, as well as political and economic risks. These risks are enhanced in emerging markets countries. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
Commentary contained within this document is for informational purposes only and is not intended as an offer or recommendation with respect to the purchase or sale of any security, option, future or other derivatives in such securities. Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy, and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
Aberdeen International Real Estate Equity Fund Q3 2019 Commentary
Reviewed by Rizki Munir
on
03.52
Rating:
Reviewed by Rizki Munir
on
03.52
Rating:
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