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High Conviction Property Securities Fund

Australia's only high conviction A-REIT fund with an ESG focus

May 2021 - Monthly REPORT

Is inflation here to stay?

SUMMARY

The Fund posted another strong month, returning 3.22% for May compared to the index of 1.78%. This outperformance of 1.44% was generated from our overweight positions in APN Property Group (that received a takeover offer from Dexus Group at an all-cash consideration of 91.5c), Charter Hall Social Infrastructure REIT, and Ingenia Communities Group.

PORTFOLIO

Top Holdings (alphabetically)

Charter Hall Group Australia Diversified REITs Charter Hall Social Infrastructure REIT Australia Specialized REITs Dexus Australia Office REITs Goodman Group Australia Industrial REITs Mirvac Group Property Trust Australia Diversified REITs

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 May 20211
1 MTH 1 YEAR SINCE INCEPTION P.A.
High Conviction Property Securities Fund 3.2% 25% 17.5%
S&P/ASX 300 A-REIT (AUD) TR Index 1.8% 25.3% -0.9%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The Fund posted another strong month, returning 3.22% for May compared to the index of 1.78%. This outperformance of 1.44% was generated from our overweight positions in APN Property Group (that received a takeover offer from Dexus at an all-cash consideration of 91.5c), Charter Hall Social Infrastructure REIT, and Ingenia Communities Group.

During the month, the market’s focus has once again been on inflation. With a much tighter economy, it is expected that inflation will pick up.  However, the question continues as to whether this spike in inflation will be sustained over the medium term and whether central banks are willing to raise rates in response to it.

Some expect a temporary pick-up in inflation (driven by oil prices, bottlenecks in supply chains due to restrictions, strong demand for goods driven by government stimulus, and divergence of spending away from travel and entertainment) but that once the stimulus runs out and the economy reopens, underlying inflation will trace back to normal levels of around 1.8% (below the RBA’s target of 2%-3%).

Others expect a more meaningful lift in inflation due to significant fiscal stimulus, particularly in the United States, and because the COVID-19 recession is not a financial crisis.

In Australia, the key drivers of inflation include:

  • The labour market tightening faster than expected with unemployment expected to fall to 4.9% by the end of 2021 and 4.3% by end of 2022 from 5.6% currently,
  • A booming housing market with increased new dwelling/rent CPI, and
  • A higher AUD leading to a moderation in FX sensitive CPI.

We are of the view that inflation in Australia is temporary – mainly due to the excess capacity that exists in the economy driven by technology, the globalisation of product and labour markets, and an aging population, all of which have contributed to low inflationary expectations and low wage growth.

Furthermore, it can be argued that real estate provides a natural hedge to inflation as most commercial leases incorporate annual rent reviews of at least CPI. Changes in inflation should then in turn cause changes in the growth component of the property IRR. Therefore, we believe the performance of commercial real estate and REITs is best assessed relative to the real bond yield, not the nominal bond yield, given the inflation hedge.

In terms of policy response, given the difficulties of central banks in achieving inflation targets since the GFC, they are not expected to increase policy rates until inflation comfortably meets their targets, and are likely to tolerate inflation exceeding their targets (2%-3%) for a period of time. As noted by RBA Governor Lowe “We will not be raising interest rates when inflation gets up to 2.2%. We want to see it there for at least a couple of quarters with reasonable prospects that it will stay there”.

With this in mind, we see a lower for longer interest rate environment, which will continue to support the real estate sector over the medium term. Currently, the sector’s average distribution yield is 4%, providing a yield gap of 2.4% to 10-year bonds.

We continue to support REITs with favourable thematics, a strong balance sheet, and good management that is able to grow earnings through accretive acquisitions and developments.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
17
MAXIMUM DRAW DOWN
-15.8%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.2059
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 6.65m
  • STRATEGY INCEPTION DATE 11 March 2020
  • BenchmarkS&P/ASX 300 A-REIT Total Return Index

Fund Managers

Amy Pham

Portfolio Manager

Jade Ong

Investment Specialist

Description

A Property Fund focussed on capital security, income yield, and sustainable growth.

The Fund believes each security has an underlying or intrinsic value and that securities become mispriced at times relative to their value and each other.

The Fund seeks to exploit such market inefficiencies by employing an active, value based investment style to capture the underlying cashflows generated from real estate assets and/or real estate businesses.

The Fund believes that responsible investing is important to generate long term sustainable returns. Incorporating ESG factors along-side financial measures provides a complete view of the risk/return characteristics of our property investments.

The Fund is benchmark unaware. All positions are high conviction and assessed on a risk-reward basis, resulting in a concentrated portfolio of 10-20 securities.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The Fund incepted on March 11th 2020.  Index performance calculations include a complete month’s performance for March 2020.  No allowance has been made for buy/sell spreads. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 11 March 2020.
3. Annualised standard deviation since inception.
4. Relative to S&P/ASX 300 A-REIT TotalReturn Index.
* For further information regarding fees please see the PDS available on our website.