Sustainable Global Real Estate Securities : September 2017 market & strategy update

La Française LUX – Sustainable Real Estate Securities fund was launched and fully invested in the second half of June 2017. Hence, it is the right time to provide the first overview of what happened in the summer in the global real estate securities arena to investors and prospects.

The aim of the fund is to be invested in securities that have an above average ESG score (as independently determined via a thorough analysis of environmental, social and governance factors by Inflection Point Capital Management UK Ltd. (“IPCM”), an ESG focused adviser which is part of La Française Group), combined with an above average, risk adjusted forward looking equity return (as analyzed by La Française Forum Securities, “LFFS”). The invested portfolio is well diversified geographically and by sector, invested in 42 individual real estate securities with an average weight of 2.3% and an average market cap of USD 12.5 bn, i.e. a large cap investment bias underpinned by the fact that larger cap names tend to – generally speaking – possess higher ESG focus and awareness. The fund’s average ESG score stands at 6.5, in comparison with the universe average of 5.6.

If we analyze the main share class of the fund for the period July 7th – end of August 2017 the fund delivered a +1.2% performance; Singapore was the best performing market generating 9.7% returns, followed by Western Europe, up by 6.7%. The weakest markets included Japan (-1.5%), Hong Kong & China (-0.3%) and the United States (-0.2%). By sector, specialty, storage and residential were the strongest sectors (all up by 5-6%), the weakest performer in this period was healthcare (-3.7%).

As the fund was just established, little rotational activity occurred at the fund level. Positions in Singapore (CapitaLand Commercial Trust and City Development) were reduced and re-invested in the US, in healthcare and retail, sectors that have been under pressure. If compared to a standard benchmark, the fund is overweight in Western Europe, Singapore and Australia, underweight in the United States, Canada and Japan. These deviations from the standard benchmark are a function of both ESG ratings and expected returns. The underweight to the US is more meaningful (ca 890bp) due to the fact that a lower proportion of US companies achieve above average ESG scores. The cash at the end of the month of July stood at 5.8%, about 1.5% higher than at the end of July, as share class hedges produced realized gains at the end of the month and these will be subsequently re-invested at the fund level.

Current outlook for real estate securities remains neutral, supported by an 8.5% discount to NAV, 4% gross p.a. dividend yield for the industry, resulting in a 240 basis points average spread to 10 year treasuries. We are currently underwriting single digit expected returns, with better value than in the US, Australia, Continental Europe, Hong Kong and Japanese developers. Earnings remain solid, with continued rental growth and capital growth; capital markets remain active on all fronts – be it M&A activity, continued debt issuances or share buybacks. The public real estate market is currently trading at cheaper valuations then the private real estate market, which is continuing to attract large volumes of capital around the world. This creates an attractive opportunity for identifying of mispriced opportunities in the public real estate domain; currently, global retail, US office markets and Japanese developers seem to exhibit greater than normal gap in pricing between public and private markets, in particular high quality asset owners seems to offer an attractive entry point on selective basis. The biggest risk to the asset class is a risk of a sharp movement in bond yields, risk of global recession or an exogenous geopolitical risk.

From a sustainability perspective, one highly encouraging development is a marked upward trend in company ESG scores over time, even in regions such as North America where scores generally lag those of Europe and Australia. The competitive “bar” continues to rise…

Sources
As at August 31, 2017. FTSE EPRA/NAREIT Global Developed Index (RUGL Index); IPCM and LFFS internal analysis, Bloomberg PORT Attribution Analysis.

Disclaimer
This is a promotional document. The information and material provided herein does not in any case represent advice, an offer, a solicitation or a recommendation to invest in specific investments. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Where La Française Forum Securities has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Issued by La Française AM Finance Services, home office 128, boulevard Raspail, 75006 Paris, France, regulated by the “Autorité de Contrôle Prudentiel” as investment services provider under the number 18673 X, affiliate of La Française. La Française AM International was approved by the CSSF on December 20, 2002. Inflection Point Capital Management is a UK-based limited liability company registered at the Companies House of England and Wales under company number 08773186 and with its registered office at 78 Brook Street, London, England, W1K 5EF, authorized and regulated by the Financial Conduct Authority. The La Francaise Forum Securities Group includes 3 investment advisors duly authorized and/or regulated in the relevant jurisdictions in which they operate: La Francaise Forum Securities Limited, a Connecticut corporation with business ID 1197680 and its registered business address at 1177 High Ridge Road, Suite 121, Stamford, Connecticut 06905, USA, registered with the U.S. Securities and Exchange Commission as an investment adviser (registration with the SEC as an investment adviser does not imply a certain level of skill or training); La Francaise Forum Securities (UK) Limited, a limited liability company registered at Companies House in England and Wales under company number 06938242 and with its registered office at 78 Brook Street, London, England, W1K 5EF, authorized and regulated by the UK Financial Conduct Authority; and La Francaise Forum Securities (SG) Pte. Limited, a private limited company registered in Singapore with registration number 201130302G and its registered office address at 8 Wilkie Road #03-01 Wilkie Edge Singapore 228095, registered with the Monetary Authority of Singapore as a fund management company and an exempt investment adviser. The information in this document has not been approved or verified by any national regulator, including the FCA, MAS and the SEC or by any U.S. state securities authority.
For investors in Switzerland: The State of the origin of the Fund is Luxembourg. In Switzerland, the Representative is ACOLIN Fund Services AG, Affolternstrasse 56, CH–8050 Zurich, whilst the Paying agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, CH-8024 Zurich. The Basic documents of the Fund such as the prospectus, the key investor information document (KIID) and the fund regulations as well as the semi-annual and annual reports may be obtained free of charge at the office of the Swiss Representative. The current document is intended for information purposes only and shall not to be used as an offer to buy and/or sell shares. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. Past performance may not be a reliable guide to future performance.

by Jana Sehnalova, Portfolio Manager