Fairtree Global RE Prescient Comment - Sep 19 - Fund Manager Comment22 Oct 2019
Having outperformed the index for every month this year, unfortunately during September we underperformed the index for the first time, with the index rising 235bps while our fund rose 155bps for 80bps of underperformance. This trims our YTD outperformance to 447bps. The main reason for this underperformance in September was the global switch from momentum to value which hurt several of our trades, notably being underweight retail stocks. Geographically, most of our underperformance came from the US which outperformed the index and where we were underweight, and many of our stocks underperformed their respective indices. We also underperformed in the UK where the index rose 7.6% for the month.
The largest positive contributor to performance was Invesco Office J-REIT, the Tokyo office property landlord, which rose 8% for the month. This is a sector we continue to favour given very low vacancy rates, decent demand and limited supply over the next few years. The second largest contributor was Colonial, the European office landlord, which rose 4% during the month. We continue to like the Paris and Spanish office property markets. The third largest contributor to performance was Mitsui Fudosan, the Japanese developer, which rose 4% as well, and is also largely a play on the Tokyo office property market at more attractive valuations.
At the opposite end of the spectrum, the largest detractor from performance was Extra Space Storage, which fell 3% after being one of the top 3 performers for the previous two months. We believe that this is the best stock in the sector, but relatively full valuations keep us equal weight the sector. The second largest detractor from performance was Dexus, the Aussie office landlord, which fell 7% during the month following on from rising 25% YTD end-August. We continue to have a small underweight in Australia as we wrestle with strong fundamentals and full valuations. The third largest detractor to performance, and on this naughty list for the second month in a row, is Japan Hotel REIT, which fell a further 3%. We have cut this position from our portfolio as the hotel oversupply situation in Japan looks unlikely to be alleviated any time soon.
Looking forward in the US, we are in a challenging environment where most of the sectors we are keen on fundamentally are at close to record valuations, and so hard to overweight, including datacentres, healthcare and net lease. Then there are the sectors we like where we hope that valuations are not too stretched yet, though still expensive, which include residential and industrial. We are underweight retail, lodging and office despite relatively attractive valuations because of weaker fundamentals. We are neutral in Japan where fundamentals are attractive and valuations for the developers are cheap, while tempering our enthusiasm on the back of Japan’s economy and demographics. We have moved to a more underweight position in Europe by exiting our Berlin residential stocks as the situation there appears unstable for the next few years. We remain overweight Singapore on the back of still attractive valuations.
- Commentary is based on USD returns, gross of investment charges, as at close of US markets (16h00 EST) on the last trading day of the month. This may differ from ZAR returns, which is shown net of investment charges, as at 15h00 CAT on the last trading day of the month.