Monetary policy these days is the gift that keeps on giving, with seemingly no limit to what central bankers will do in the name of easing.
I’ve touched on Super Mario’s tactics before in this column when discussing the outlook for European fixed income and equities, but they have also provided a significant tailwind for another sub-set asset class that has received less attention: European real estate securities.
The decision to add corporate bonds to the monthly shopping list of government, agency and covered bonds was a game changer. A month on, estimated spending of ¤5-10bn (£4-9bn) has squeezed yields further – taking them into negative territory in some cases – and made European property shares more attractive for those on the hunt for income.
A fund I really like in this space is F&C Real Estate Securities. F&C is one of the bigger players in this space and runs several other similar mandates. Consequently, it has one of the best-resourced and most experienced teams in European listed real estate. Despite these credentials, this fund has somehow remained a hidden gem with just £107m under management.
The lead managers are Marcus Phayre-Mudge and Alban Lhonneur. Mr Phayre-Mudge has been involved in property investment since 1992 and has had success running the TR Property Investment Trust since 2004. Mr Lhonneur’s career in property started in 2006 and, prior to joining F&C, he worked at Citigroup and Société Générale.
The F&C fund invests in commercial and residential real estate securities in Europe and the UK. The managers split the investable universe into 16 sub-sectors and form a macroeconomic view as to which to over- or under-weight. Individual stocks are then subjected to fundamental analysis.
Every stock they cover is given an expected and required return. Riskier stocks have higher return requirements. Stocks that they believe can outperform the benchmark and their required return are overweighted. However, as this is a tight universe with only 85 companies in the index (which includes a long tail of very small companies), the managers use the full range of tools available to them to express a wider range of views, increase conviction and better manage risk.
This means they will often short stocks (up to 10 per cent of net asset value) on which they have a negative view, which is unusual in their peer group. Put into practice, it translates into consistent outperformance and favourable risk/return characteristics.
They have 70 per cent in large caps, 20 per cent in mid caps (which is where they also have the majority of their short positions) and 10 per cent in small caps. Around a third of these are residentially linked companies.
Approximately 30 per cent of the fund is invested in the UK. The next highest weighting is Germany at 22 per cent, then France (12 per cent) and Sweden (10 per cent).
In the very short term, real estate securities are correlated to the wider equity markets, but over the longer term they have a higher correlation to the underlying property markets. At a time when bricks-and-mortar property funds are in the spotlight, this asset class gives investors another, more liquid, alternative.
Darius McDermott is managing director of FundCalibre