Joining Zenith’s portfolio solutions team and based in Sydney, Charl Marais brings more than 20 years of experience across portfolio management, manager research and selection, and multi-asset strategies.

Most recently, Marais was a senior portfolio manager at Yarra Capital Management, where he oversaw investment performance across the business’ funds and mandates, and held responsibility for external manager research and selection.

Prior to Yarra Capital, he was a senior portfolio manager at Nikko Asset Management. He has also held roles at Suncorp Group, Morningstar, and earlier in his career at Absa Bank. Marais holds a Chartered Financial Analyst (CFA) designation and a Financial Risk Manager (FRM) certification, as well as a Bachelor and Master of Chemical Engineering from Stellenbosch University.

Marais will report to head of portfolio solutions, Andrew Yap, who says the appointment reflects the growing demand for Zenith’s portfolio management capabilities.

“Charl brings a depth of experience that spans institutional portfolio management, external manager research, and multi-asset portfolio construction across some of Australia’s most respected investment firms,” Yap says.

“His experience demonstrates exactly the kind of rigorous, performance-focused approach our growing client base expects. We’re looking forward to the expanded capacity his appointment will bring to the team.”

Cave rejoins Zenith having originally entered the business in 2017 as a senior investment analyst, before departing in 2023.

He returns to Zenith from Frontier Advisors, where he spent three years as a senior investment consultant on the real assets team conducting manager research and advising institutional clients on private infrastructure. He holds a Bachelor of Economics and Finance from RMIT University.

In his new role, he will be based in Melbourne and report to head of income research and head of sustainability, Dugald Higgins. Higgins welcomed Cave’s return to the business.

“Dan has deep expertise in income research and a thorough understanding of how Zenith operates – he knows our standards, our methodology and our clients,” Higgins says.

“He returns with a broader perspective on the institutional market and a sharper focus on private markets, which adds a valuable dimension to our income research capability. This is a newly created role and Dan will play a central part in continuing to strengthen our offering.”

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Dan Cave

To say that COVID-19 has triggered a rollercoaster for markets across the globe is an understatement. The property sector has been particularly impacted though not always in the most predictable way.

One stock that has typified the rollercoaster in REIT markets since COVID is Unibail-Rodamco-Westfield (URW), Europe’s largest shopping mall owner. Saddled with high debts owing to the 2018 acquisition of Westfield’s international assets, URW was facing a slowing European economy and headwinds from increasing online sales penetration.

Further heat was applied as the pandemic sparked declines in income and capital values, across its assets. In response, the Board proposed a capital raising, which was ultimately blocked by activist investors and resulted in the subsequent replacement of both the Board and Chief Executive Officer. Following this, URW announced a long-term deleveraging plan of asset sales and the suspension of dividends for the next three years.

Notwithstanding this litany of issues, URW returned 73.1% in the month of November 2020 on news of the vaccine and continued to outperform, delivering 95.9% from 31 October 2020 to 31 May 2021 compared with the broader G-REIT market that returned 32.3% over the same period. All this from a company who has again withdrawn financial guidance for 2021.

Value versus growth – how is it different in REITs?

Earnings growth for REITs typically comes in the form of rent growth, and while REITs do have the ability to grow their portfolios somewhat, through development and funds management, the economics are very much linked to the property market. This differs from general equities where earnings can grow (or decline) at a more rapid rate, but also can be more volatile, unlike the income streams derived from contracted lease agreements.

While the notions of growth and value applies to GREITs in more of a property market context, the equity style factors are more applicable to A-REITs. This is due to the fact that A-REIT legislation is more accommodative in defining activities compared to their global counterparts, which don’t permit large exposures to non-rental earnings. Accordingly, some A-REITs can exhibit stronger growth and value characteristics based on these corporate earnings.

Rather than using a traditional equity growth and value lens to understand performance of REIT markets since COVID, we believe looking at which sectors are cyclical compared to those driven by secular trends is more instructive, although we note that these headwinds or tailwinds were largely in place before the pandemic.

Cyclical versus secular sectors

Following the market dislocation of March 2020, a large dispersion in REIT valuations emerged. Sectors considered cyclical owing their exposure to white collar employment growth, discretionary consumer spending and reliance on footfall traffic such as office, retail and hotels, traded at deep discounts. Conversely, sectors that were supported by secular themes, traded at or above their underlying property value as investors favoured greater earnings certainty over value. Examples include the technology-linked data centres and cellular towers, demographic driven healthcare and residential, and online sales penetration as a tailwind for industrial/logistics and a headwind for retail.

The vaccine surge

Following the announcement of a vaccine on 2 November 2020, equity markets, including REITs, surged. With large parts of the listed property market still trading at a discount to Net Asset Value (NAV) at the time, due to very uncertain outlooks across the sector, it’s not surprising that real estate securities performed very strongly as markets rebounded with the expectation of societies reopening.

Examining the US market, which accounts for over 50% of the G-REIT universe (as represented by the FTSE EPRA/NAREIT Developed Index), we can see the stark performance difference between the most cyclically linked companies and the least cyclical, as measured by economic sensitivity by DWS.

Note: segments derived from stock and sector economic sensitivity, ranked in quintiles by DWS. Source: Ironbark, DWS, Zenith Investment Partners

The hotels, retail, gaming and industrial sectors (Quintile 4 and 5) outperformed healthcare, net lease (long WALE) and self-storage (Quintile 1 and 2) by approximately 65% from the vaccine announcement to 31 May 2021. The most cyclically linked sectors also outperformed Quintile 3 by over 40% which included apartments, data centres, office and malls sectors) over the same period.

Quantity over quality

Given the remarkable surge in equity markets it’s not surprising that lower quality REITs, typified by higher leverage, outperformed. Whether this was good quality balance sheets impacted by COVID or lower quality companies with higher structural gearing prior to COVID, highly levered companies outperformed lower levered since the vaccine news broke.

How did this translate to manager performance?

In terms of peer group performance over the last 12 months, we can use the old sporting cliché, “it was a game of two halves”.

Many G-REIT managers delivered strong outperformance through the COVID period up until October 2020. Whilst not positioned for the pandemic per se, many global managers were positioned for a declining property market and slowing global economy, instead focusing on sectors with secular tailwinds over cyclical. Also, given the uncertain outlook across both equity and real estate markets over 2020, managers focused their efforts on assessing balance sheets, with a preference for companies with low gearing, sufficient liquidity and ample headroom to debt covenants. These strategies largely provided investors with strong excess returns for the 12 months to 31 October 2020.

However, once the vaccine news broke and the market rotated into cyclically focused sectors (despite their challenged outlooks), many managers lagged the market, with most active funds finishing the 12 months to 31 May 2021 underperforming the Zenith assigned benchmark. While underperformance of the magnitude observed isn’t outside of expectations, we note that the speed in which the rolling performance for many in the peer group went from positive to negative was extreme.

Given the prevalence of corporate earnings in the A-REIT market, we see a greater diversity across the peer group with respect to manager’s investment strategies. Across the A-REIT peer group there’s a cohort of managers with an explicit value focus, which in some cases is coupled with a preference for rental income and yield.

Comparing this value/income cohort with the remaining active managers in the Zenith rated peer group, we can see that the value rotation has influenced manager performance with the average rolling excess returns for the cohorts almost perfectly negatively correlated since the vaccine news.

By Dan Cave Senior Investment Analyst

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Dan Cave

2020 is proving to be a challenging year for investors with most asset classes adversely impacted by the COVID-19 global pandemic.

In its latest sector report on Property, Zenith Investment Partners found that property investors have not been immune to market volatility. For the 12 months to 31 May 2020, the Australian and Global Real Estate Investment Trusts (A-REITs and G-REITs) indices delivered -16.40% and -18.66%, underperforming their broader Australian and Global equities counterparts by 9.88% and 23.52%. (The S&P/ASX 300 Index returned -6.52% while the MSCI World ex Aust $A Hedged Index returned 4.86%.)

According to Dan Cave, Senior Investment Analyst at Zenith, given the current climate, these returns are not surprising.

“Property’s performance is fundamentally underpinned by activity and interaction between people,” said Cave. “The COVID-19-led social distancing policies enacted around the world have had a profound impact on the usage of property across many property types.

“Amongst Zenith’s rated Australian property managers, performance relative to the benchmark was mixed with the median manager returning -14.37%, marginally outperforming the benchmark on a net return basis,” said Cave. “While returns from our global rated property managers were negative on an absolute basis, relative performance was much stronger, with all but one manager outperforming the benchmark.”

Despite disappointing returns through the crisis, Cave still believes there is a place for A-REITS and G-REITS in investor portfolios as they still have several attractive attributes.

“REITS offer diversification benefits for multi-asset portfolios due to the asset classes’ underlying characteristics. There are also yield advantages owing to the rental income focus, and the opportunity for further sub-sector diversification across the emerging alternative sectors which provides lower levels of cyclicality compared to traditional property types.”

Traditional core sub-sectors – office, retail and industrial tend to be pro-cyclical and as such returns carry a moderate-to-strong correlation to each other. Alternative sectors such as self-storage, data centres and manufactured housing, with their different drivers, can offer lower cyclicality, reducing REIT portfolio volatility and enhancing risk-adjusted returns.

“This is more evident in the global context,” said Cave. “Technology-related segments of the G-REIT market have proven to be most resilient. Data Centres REITs delivered approximately 18% for the year to 31 May, while industrial REITs driven by e-commerce and logistics, returned -1.71% over the same period. Hotels and resort, shopping centres and hospitality-focused sectors fared the worst returning -49%, -41% and -29% respectively.

“The outbreak of COVID-19 has quickly translated into a severe shock for the global economy and real estate markets, and the situation continues to be fast-moving. Zenith will continue to observe the sector closely, with a focus on how fund managers, landlords and tenants respond to current challenges and how this likely impacts or rewards investors.”

Read the condensed sector report.

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Dan Cave

Despite the market falls in March 2020, the Global Listed Infrastructure (GLI) sector has continued to deliver on its attractive return attributes for the 12 months to 31 March 2020, with the sector outperforming global equities with lower volatility.

In its 2020 Infrastructure Sector Report, Zenith Investment Partners contends that investors can benefit from a GLI allocation in a diversified portfolio. This is due to its unique return profile that typically provides equity-like returns with lower volatility, which can be largely attributed to the attractive and stable yields.

For Dan Cave, Senior Investment Analyst at Zenith, the GLI sector, although not immune to listed market volatility, typically provides a greater level of downside protection when compared to broader global equity indices as it has less exposure to short-term business conditions, competition, economic conditions and commodity prices than broader industrial equities.

“Obviously, absolute returns for the period have been impacted, with the median manager across our rated GLI funds delivering -9.25% (after fees). However, they outperformed Global equities, which produced a return of -11.11% for the same period,” said Cave.

In the most recent market turmoil, Cave acknowledges that GLI has broadly performed in line with global equities, providing only marginal downside protection. “A large contributor to GLI’s negative returns has been the transport-related segments of the infrastructure market (airports and toll roads), which have been some of the hardest hit due to large falls in patronage levels. In contrast regulated utilities have outperformed global equities as their regulated earnings are more resilient due to their essential role in society, especially in a COVID-19 shutdown”.

“Despite so much uncertainty surrounding COVID-19’s impact on global markets and the real economy, Zenith believes GLI still has a strong role to play in an investor’s portfolio. This is due to the sector’s stable earnings profile, especially in a recessionary environment. While not all segments have performed in a defensive manner in the recent market drawdown, we believe an allocation to GLI provides diversification benefits to investors through the cycle due to its inherent defensiveness relative to equities.”

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