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Glimmers of hope?
The removal of the material uncertainty clauses that obliged property funds to close en masse this Spring is some kind of light at the end of the tunnel for the sector.
The reopening of these portfolios is still a way off, not least because Brexit issues and the risk of a Covid-19 second wave may still be coming down the tracks. But DFMs who’ve been forced to conduct valuation exercises themselves may now get a helping hand: funds are likely to begin officially revaluing their portfolios now clauses have been removed.
As we’ve discussed over the past year, most wealth firms have long since shifted allocations away from open-ended property funds, instead favouring either Reits, trackers or infrastructure plays.
The outlook for commercial property in particular, whatever wrapper it’s held in, remains highly uncertain. The Gravis UK Listed Property Fund acronym – Gulp – is still pertinent. But so far, those who have shifted to Reits will be pleasantly surprised by how events have progressed since March.
Most Reits and other commercial property trusts remain on major discounts to NAV. The exceptions are the warehousing plays, whose reliance on the likes of Amazon meant they quickly returned to premiums. There are other standouts – like AEW UK, the only mainstream commercial trust not to cut its dividend during the pandemic. But it’s LXI Reit, whose portfolio mix has helped lift it to a discount of a mere 8.5 per cent, that’s the most popular with wealth managers according to our fund selection database.
Those buyers seeking more generalist exposures have tended to turn to trackers like the iShares MSCI Target UK Real Estate ETF. The index is now down a relatively respectable 13 per cent year to date. Actively managed offerings like Gulp have limited losses further: its 2020 performance is comparable with the listed infrastructure funds that feature on most wealth firms’ real asset buy-lists. For now at least, the sector is holding up as well as could be expected.
The tech sell-off may end up being short-lived, but that doesn’t mean it won’t prove useful – both as a means of taking some heat out of the market, and as an exercise in how other sectors and assets perform at a time of tech aversion.
So as the Nasdaq fell into correction territory overnight, allocators will have been monitoring other sectors just as closely. No sign here of a downturn in ESG interest: US ESG ETFs have held up pretty well over the past week. And while US financials and value stocks didn’t shed as much as the Faangs et al, nor did they show much signs of powering ahead.
That suggests this was a story of some investors losing faith in the big tech names, rather than rotating into 2020’s laggards.
What of other sectors and asset classes? Energy stocks’ struggles can be put down to another slump in the oil price – signs that the economic recovery is far from assured. Allocators will have been pleased by the sight of US Treasury prices ticking higher and other equity markets, like Europe, showing a degree of resilience. That will reassure those who shifted allocations back across to this side of the Atlantic in anticipation of just such an event.
But there was one part of the global equity market that’s struggled to shake off the tech slump: emerging markets. A sixth consecutive daily decline indicates EM indices remain vulnerable to almost any kind of risk-off sentiment.
Aim dividends will fall by a least a third this year, according to analysis by Link published this week. But the market remains a rare success story this year for DFMs. For starters, few wealth firms hold such stocks for their dividends: payout growth of 18 per cent per annum has been a bonus rather than a pillar of the investment case.
Secondly, the predicted fall is still better than that estimated for the main market. And most importantly, Aim’s surprising capital growth strength has continued over the summer. Having broadly matched the All-Share and outpaced the Small Cap Index during the March sell-off, the Aim All-Share has risen by twice as much in the resulting recovery. It’s now in the black for 2020, whereas mainstream indices are still 20 per cent lower. That will do nicely for those running dedicated portfolios in the space.