Chris Bedingfield

The Quay Global Real Estate Fund (Unhedged) Active ETF (ASX:QGRU) and the Quay Global Real Estate Fund (AUD Hedged) Active ETF (ASX:QGFH) are available for trading on the ASX from Monday 24 November.

Offering investors enhanced access to Quay Global Investors funds via the ASX is a significant milestone in the twelve year history of the highly-rated award-winning Quay Global Investors team lead by Justin Blaess and Chris Bedingfield. Demand for an ASX listed offering speaks to the strength of Quay’s proposition and their commitment to the preservation and creation of wealth through a differentiated approach to managing global real estate equity portfolios.

The new active ETFs provide ASX investors with access to a concentrated, high conviction portfolio of real estate securities listed on exchanges around the world. Unlike the Australian real estate market which primarily offers exposure to the retail, office and residential sectors, global real estate offers a much broader universe including aged care, student housing, data centres and storage facilities.

The objective of the ETFs is to provide investors with a total return (before fees and expenses) of the Australian Consumer Price Index (CPI) plus five per cent per annum measured over five years or more. The portfolio typically holds 20 to 40 securities, with most income derived from leases, rent and other real estate related income.

Gillian Larkin, chair of the Bennelong Funds Management Ltd Board said: “Quay are one of Bennelong’s strongest and fastest-growing investment partners. These two new active ETFs represent an important step in Bennelong’s strategy to enhance investor access to our leading investment solutions.”

Bennelong Funds Management CEO John Burke said: “Share market natives have limited options to build a high conviction index unaware allocation to global property, so making Quay’s popular proposition available via the ASX was a logical step.

“Active ETFs are an increasingly popular investment vehicle, and we are seeing retail investors seeking more sophisticated ETF offerings, which replicate those managed by experienced investment teams such as Quay Global Investors.” said Mr Burke.

Quay principal and portfolio manager Justin Blaess said: “The team is proud to reach this milestone. As specialists in listed real estate securities globally we believe an active exposure to global listed property can be a valuable inclusion in a truly diversified portfolio.”

Quay principal and portfolio manager Chris Bedingfield adds that the market conditions are supportive of global real estate investments.

“As investors we are observing deeply discounted valuations globally and consider them to be markedly disconnected from the sector’s robust fundamentals. As such, discounted valuations provide us with opportunity,” said Mr Bedingfield.

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Chris Bedingfield

Quay Global Investors, a Bennelong boutique, has celebrated its 10-year fund anniversary, returning 10.05 per cent per annum* since inception to investors in its Quay Global Real Estate Fund (Unhedged). 

The active listed global real estate manager has outperformed its index* by 3.81 per cent since inception.

The 10-year milestone also saw Quay reach $1 billion in funds under management.

Co-principal and portfolio managers Justin Blaess and Chris Bedingfield attributed the success of the business to its outstanding investment team, unique investment philosophy, as well as the ongoing support of Bennelong Funds Management.

“Reaching our tenth anniversary, as well as $1 billion in funds under management, is a great achievement. Our success reflects the trust investors place in our team’s expertise and dedication.

“We continue to see strong opportunities for investors in global real estate, particularly off the back of renewed expectations of interest rate cuts in the US, and look forward to another decade of success for our investors.

“It’s been great working alongside the talented team at Bennelong to reach this milestone,” Mr Bedingfield says.

Quay partnered with Bennelong Funds Management in 2015.

Bennelong CEO, John Burke, said that co-founders Chris Bedingfield and Justin Blaess have led the business to outstanding success over the past decade.

“Quay has consistently grown while providing investors with solid returns and access to a diverse range of listed real estate opportunities across the globe, at a time of continuous change in markets.

“Thank you to the investors who have joined us on Quay’s journey. We’re proud of the team’s accomplishments and look forward to many more years of successful partnership.”

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Justin Blaess

Being an investor in listed global real estate has been tough of late.

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Justin Blaess

When investing in real estate, higher inflation is more likely to be a friend than a foe, helping protect investment from supply side issues and driving up the residual value of improvements, says Justin Blaess, portfolio manager at Quay Global Investors.

“We take the view that investors shouldn’t fear inflation, particularly when it comes to real estate,” he says.

“Indeed, we believe real estate – and thereby listed real estate – is a good inflation hedge. Land is tangible, and well-located land has an intrinsic value; it can be used as a place to build shelter or as a place to do business or access services.

“Because of supply constraints, well-located land will generally appreciate over time. In addition, the cost of replacing any improvements built on the land will also increase through inflation. This is significant, because if there is excess demand for a type of real estate, the market will have to accept rising costs and thereby the rents required to economically justify construction – regardless of the inflation environment.

“Investors in real estate – both direct and listed – can therefore benefit from a higher inflation environment, particularly compared to global equities investments.”

Mr Blaess says it’s worth understanding how listed real estate has performed in previous periods where inflation has been elevated.

“Some questions for investors to consider include: at what levels of inflation does real estate perform best? Can there be too much inflation? Not enough inflation? What if the current US bond yields are correct (currently 1.2 per cent per annum) and we are headed for sustained low inflation?”

To answer these questions, Quay analysed US REIT and S&P500 real and nominal returns by constructing indices for when headline CPI was both less than and greater than 3 per cent and in increasing increments of 1 per cent. From these indices the average monthly nominal and real returns could be calculated for the purpose of comparison.

“Our analysis shows that listed real estate is an excellent hedge for inflation and has historically delivered strong positive nominal and real returns in higher inflationary environments. It also offers a better relative return when compared to general equities.

“This is especially so when inflation is in the moderate 3 to 6 per cent range, where listed real estate has historically generated more than double the real return relative to equities. Even with very high inflation (6 per cent and above), listed real estate continues to outperform equities (albeit at a lower relative level than in a moderate inflation scenario).

“It’s also interesting to note that over the past 50 years, inflation has been above 3 per cent more often than below. When it has been below 3 per cent, listed real estate nominal and real returns have been quite a bit lower than in a moderate inflation environment. And contrary to common belief, in lower inflation settings listed real estate returns actually tend to lag equities.

“So as someone with a vested interest in the performance and outlook for real estate, when it comes to inflation, we say ‘take a long view and don’t be fearful’,” Mr Blaess says

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Justin Blaess

Bennelong Funds Management’s global real estate manager, Quay Global Investors, has won its first institutional mandate, partnering with Avant, one of Australia’s leading medical defence organisations representing over 78,000 health practitioners and medical students.

Founded in 2013, Quay is a boutique asset manager focused on the preservation of capital and creation of wealth through strategies in real estate securities.

Avant’s Chief Investment Officer, John Lucey, said, “Avant is delighted to be Quay’s first institutional client.

“We have regularly backed new boutique managers and believe that our portfolio benefits greatly by being early adopters of high quality managers such as Quay.”

Justin Blaess, portfolio manager and co-founder of Quay, said, “When we formed Quay back in 2013, we believed there would be institutional demand for a truly index unaware strategy focusing CPI plus style total returns. We believe the support from Avant vindicates our original vision.”

Bennelong Funds Management’s Institutional Distribution Executive, Jeremy Crowley, added, “Quay is a truly benchmark unaware property manager providing investors with property exposure that is well diversified, investing in sectors like student accommodation, manufactured housing, storage and health care.

“These attractive themes are really starting to resonate with Australian institutional investors, which is pleasing.”

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Chris Bedingfield

The Quay Global Real Estate Fund has been upgraded to a recommended rating from Zenith Investment Partners, recognising the fund’s recent strong performance and business growth.

The Quay Global Real Estate Fund, which was launched in 2014, is the flagship fund of Quay Global Investors, founded by portfolio managers Justin Blaess and Chris Bedingfield as a boutique investment manager focused on global listed real estate securities. In 2015, Quay Global Investors partnered with Bennelong Funds Management.

In its assessment report, Zenith noted: “Zenith views Quay’s approach to listed property investing as differentiated compared to peers, specifically the team’s focus on companies trading at a discount to replacement cost. In Zenith’s opinion, this approach combined with the Fund’s total return focus should provide a defensive exposure to global listed property over the long term.

“Zenith’s conviction is underpinned by Quay’s differentiated investment process, which is intuitively appealing, combined with the team’s strong understanding of real estate markets with in-depth fundamental research.

“Zenith believes that both Bedingfield and Blaess are high calibre global real estate investors.

“Overall Zenith believes the portfolio construction process is robust and results in a portfolio that is reflective of the Fund’s total return and high conviction approach.”

Bennelong’s head of retail investment sales, Jonas Daly, said the rating upgrade reflects the knowledge and experience of Mr Blaess and Mr Bedingfield as well as the calibre of the Quay team.

“Justin, Chris and the team have delivered consistently strong investment outcomes, with Zenith noting the positive funds under management trend reflecting adviser support into the fund.

“This upgraded rating continues the positive momentum Quay has been building for the past few years and will further assist with growing the dealer and adviser base in accessing the fund.

“The fund is performing particularly well and, given it takes a long-term view, that’s likely to improve over time – which is exciting for us and Quay’s investors,” said Mr Daly.

According to the Morningstar® Australian Institutional Sector Survey at 30 June 2019, the Quay Global Real Estate Fund is the top performing global REIT over one, three and five years. The fund has returned 15.6 percent p.a. over the past five years, outperforming the index* by 4.3 percent p.a. after fees and charges (at 31 July 2019). 

In addition to its rating upgrade and strong performance, the fund was recently added to the Colonial Firstwrap platform, further consolidating its position with existing platforms including MLC, ANZ Grow, IOOF, and Wealthtrac. The fund is also rated ‘Recommended’ by Lonsec and ‘Outstanding’ by SQM.

——-

*FTSE/ EPRA NAREIT Developed Index Net TR AUD

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No-one knows the timing of the next economic downturn but at some point this economic cycle will run out of steam.

And what will that tell us about the economy, equities and real estate?

It’s been 10 years since the global financial crisis tore through markets in the months surrounding the collapse of Lehman Brothers in October 2008. While the tussle between the bulls and bears is always ongoing, in the time since it has been the bulls that have, on average, been winning.

Driving this has been almost 10 years of unbroken economic growth in the US. While no one knows when growth will slow, the Federal Reserve is intent, through successive rate rises, on ensuring that the economy does not overheat. At some stage tighter monetary conditions will bite, and the economic indicators will start pointing towards a slower rate of growth.

How would the market react to a change of outlook? Could it be the catalyst for equity markets to take pause, and what would be the implication for global real estate?

It’s often said that real asset classes (such as global real estate) offer attractive attributes later in economic cycles, and particularly when the yield curve is flattening or inverts. This paper will look at the validity of this theory.

What goes around comes around

Much has been said about the yield curve as a predictor of economic slowdowns in the US. In March this year, the Federal Reserve Board of San Francisco (FRBSF) published a paper titled Economic Forecasts with the Yield Curve. They conclude that the yield curve or term spread, being the difference between long-term (10-year) and short-term (2-year) interest rates, is a strikingly accurate predictor of future economic activity. In fact, every US recession in the past 60 years was predicted by a negative term spread – that is, an inverted yield curve. Furthermore, they also note that a negative term spread was always followed by an economic slowdown and, except once, a recession.

Interestingly, the FRBSF also noted that the delay between the yield curve turning negative and the beginning of a recession has ranged between six and 24 months; and while historical circumstances differed across these episodes, the patterns of past yield-curve inversions were remarkably similar: The decline in the term spread was generally driven by a pronounced increase in the short-term interest rates. Long-term rates, on the other hand, typically moved much more gradually and either increased slightly over those periods or declined.

In September this year the Federal Reserve raised its Fed Funds rate for the eighth time since late 2015 and signalled three more hikes into 2019. Over those three years the Fed Funds rate has increased 200bps, while the US 10-year treasury yield sits only 85bps higher. As we sit here today, the term spread is now at less than 30bps and is hovering at the lows for this cycle as short-term interest rates continue to rise faster than the 10-year treasury yield. Sound familiar?

How vulnerable are markets to US economic health?

Global equities (as represented by the MSCI World Index) has a 62% weighting to the US that, over the past five years, has contributed 34% of the 39% total return enjoyed in USD terms. In other words, approximately 62% of the index has contributed 87% of the return. While it’s true that not all revenues are earned in the US (estimated at ~70%), US GDP represents 24% of world GDP and the US is the largest trading partner with the EU, China, Japan and Canada among others.

It therefore stands to reason that if the US economy happens to hit a speed bump, the risks to the outlook for aggregate equity market earnings and therefore returns would likely be to the downside.

How equities and real estate perform

For this analysis we observed the five most recent prior economic downturns in the US as defined by the National Bureau of Economic Research (NBER):

1. January 1980 – July 1980
2. July 1981 – November 1982
3. July 1990 – March 1991
4. March 2001 – November 2001
5. December 2007 – June 2009

For each period we analysed the performance of global equities and global real estate relative to each other, starting from 12 months prior to the yield curve inverting through to the end of the following economic downturn. (We chose 12 months as an arbitrary number and it is not meant to be a forecast.) As global real estate data isn’t available prior to December 1989, we used the Wilshire US REIT Total Return Index as a proxy for the periods prior. We believe this is justified, owing to the over-represented weight of US REITs in the global index (~54%) and the long-term 99% correlation.

This analysis shows that in the lead up to the yield curve inverting – and even after – global equities has historically performed well. However, at some point, reality bites and returns (in all but the period covering 1978) were given back. The magnitude and duration of the declines varied around the severity and reasons behind each of the downturns.

The same analysis of global real estate showed that in all observations, total returns were positive in the lead up to the yield curve inverting – and continued to be so in the following 12-18 months.

Relative performance in the period before the yield curve inverted was mixed, with global real estate underperforming global equities in the periods 1989 and 2000, but out-performing in the other periods. However, once the curve did invert, global real estate outperformed global equities over the subsequent 12 months or longer in all but one observation – the recession of 1990/91.

We believe the poor relative performance of listed real estate for this period can be explained by the circumstances. In 1989 inflation in the US was rising, and the response from the Federal Reserve was to raise short-term interest rates to 9.75%. This came at the same time as a period of elevated supply in commercial real estate markets. It was a similar story in the UK, Australia and many other developed economies. As a result, commercial real estate markets were hit hard by a combination of waning economic activity and delivery of new supply.

More recently, during 2005/06 in the lead up to the GFC, global real estate outperformed global equities both before and well and truly after the yield curve had inverted. It was not until February 2007 that the relative performance started to unwind. During the 15 months before February 2007, the date the yield curve inverted, global real estate outperformed global equities by +29%. If we include the 12-month period prior, the relative performance was +41%.

So, what does this mean?

The reason global real estate has in the past outperformed global equities during the period preceding and during an economic slowdown is because of the relative defensiveness of the earnings. Revenue is derived from rent, which is often subject to contractual leases of varying terms with fixed or inflation linked growth. Revenue will therefore generally be more reliable and less cyclical.

What’s more, real estate entities, as they are not manufacturing widgets or providing consumer services and employ less people, will generally have much higher operating or EBITDA margins. The right real estate – well located and servicing industry segments backed by long-term positive secular trends – will always be sought, regardless of the economic conditions. And, provided the real estate sits inside entities with sustainable capital structures and disciplined management, in our opinion the risk of permanent capital loss is low.

While the circumstances of prior slowdowns were different, we can observe that, apart from 1989/91, global real estate provided better returns than global equities in the lead up to the yield curve inverting and for a significant period after. Today, unlike 1989/91, outside of a few select markets and sectors, there is no evidence of a global surge in new real estate supply.

Moreover, today’s listed real estate balance sheets are on average more conservatively geared (certainly relative to pre-GFC), earnings payout ratios are lower, and business strategies more risk averse. We believe all this should bode well for the relative defensive characteristics of global real estate.

No-one knows the timing of the next economic downturn, although some commentators are now pointing to the roll off in US government fiscal stimulus as a potential catalyst and the year 2020 seems to be getting some attention in popular media. Only time will tell if this is right – but at some point, this economic cycle will run out of steam. It might therefore make sense for those with equity allocations to start thinking about the benefits of including global real estate as part of that allocation.

By Justin Blaess, Principal and Portfolio Manager

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The content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. The commentary in this article in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader.

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Sarah Shaw

Ongoing political constraints, shifting economic trends and long-term social changes are creating significant investment opportunities globally, according to Bennelong Funds Management’s boutique partners 4D Infrastructure, Quay Global Investors and Wheelhouse Partners.

Sarah Shaw, CIO at 4D Infrastructure, says economic growth combined with major public policy initiatives are contributing to a rapidly expanding middle class.

“It’s estimated that 160 million people will join the middle class annually for the next five years, with the majority in Asia.

“This will drive a change in consumption patterns to more services-oriented expenditure as well as demand for new and improved infrastructure, starting with basic utilities and moving to roads and airports as wealth improves.

“The opportunity for infrastructure investment in this environment will be significant as new assets are developed and existing assets are sold or ‘recycled’ by governments, and private sector financing will inevitably play an increasingly important role in funding these changes,” says Ms Shaw.

“An infrastructure portfolio is not just a ‘bond proxy’, and can be positioned for growth in a strong macro environment by holding user pay assets such as roads, ports, airports and rail, which perform well due to their correlation with GDP growth.

“As a result, we are currently overweight user pays as traffic volumes typically grow as a multiple of GDP growth. In the longer term these assets will also benefit from the emergence of the middle class.

“And like all infrastructure assets, they have high barriers to entry, visible earnings and high operating leverage – all of which make them attractive investments.”

Justin Blaess, principal and portfolio manager with Quay Global Investors, also says social trends are driving opportunities in specific property sectors, many of which are not available in the Australian market.

“One such theme in US markets is multi-family dwellings.

“Home ownership rates remain near 50-year lows, and renter-occupied dwellings as a percentage of total housing stock continues to rise. What’s more, approximately 85% of those renters will seek an apartment or multi-family dwelling to reside in.”

He says companies that supply these ‘multi-family’ apartments, particularly those with a focus on the supply-constrained markets along the west coast of the US, are well-positioned to perform.

“Since the GFC, prices have recovered in many of the multi-family markets which has triggered a resultant supply response in the sector. However, this is not out of line with the historical relationship between jobs created and in the context of the strong demand drivers.

“The result has been strong rental growth, especially on the west coast where jobs and wages growth has been strongest. Additionally, construction cost inflation is making developments harder to stack, which is tempering further supply and is likely to elongate the cycle, increasing the attractiveness for investors.”

He added that contrary to popular opinion, a rising interest environment around the world is not necessarily bad for global real estate investments.

“In the short-term, noise around interest rates rising in the US has been creating share price headwinds and creating opportunity.”

“However, while 10-year bond yields have been rising, so have inflation expectations. Inflation is good for real estate – rents are often linked to inflation, and replacement cost, or supply, is impacted by higher input costs, requiring higher rents to justify development.

“Picking real estate winners in the long term isn’t just about discount to net asset value, especially later in the cycle where valuations for certain asset classes may be elevated and forecast total returns low. We prefer to focus on long-term total returns and identifying investment opportunities at or below replacement cost that have focused strategies and sustainable capital structures,” says Mr Blaess.

Meanwhile, Wheelhouse Partners’ CEO Alastair MacLeod highlights the implications that the changing economic environment will have on retirees’ portfolios, and says there are unique investment challenges faced by this group.

“Retirees require growth for their savings to fund ever-lengthening life expectancies, so equities are an important part of their asset allocation decision.

“However, retirees need those equity returns delivered in a more ‘retiree-friendly’ shape that incorporates a higher component of income along with greater levels of capital preservation.”

He says that adding a “defensive growth” allocation to a global equities portfolio to help achieve this is increasingly important for retirees, which is managed by running a systematic derivatives overlay on a concentrated equity portfolio.

“There are two elements to this approach. Most equity returns are two thirds capital and one third income, with dividends delivering the income. The derivative overlay reverses this mix, delivering an equity return that is two thirds income-driven and not overly reliant on high dividend-paying sectors.

“No one wants to buy into a bond proxy at this point of the market, so where do you get the growth? This is the beauty of a derivatives overlay – it means a portfolio can be growth-oriented but still deliver a strong income-based return.”

Pointing to some of the tech allocation in the portfolio, he says companies like Adobe Systems, Salesforce.com, Veeva Systems and Amazon generate revenue growth of more than 20%, but none of them pay dividends.

“We nevertheless aim to deliver a 5-6% income stream, an importantly the underlying portfolio has genuine growth prospects which adds capital growth to the total return an investor receives.

“It is an improved investment outcome for retirees and delivers equity growth in an income-driven and retiree-friendly shape,” Mr MacLeod says.

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Justin Blaess

A decade on from the global financial crisis, Western economies are now growing in unison.

US tax cuts passed before Christmas and continuing strong economic data are expected to further boost growth. In the Eurozone, the European Central Bank (ECB) in its December meeting minutes suggested the Eurozone is in its best shape in a decade and signalled that it might phase out its quantitative easing (QE) sooner than expected. Even in Japan, speculation has shifted to whether the Bank of Japan (BOJ) may dial back its easing program following the footsteps of the Federal Reserve and the ECB.

In response to this, long-dated government bond yields and inflation expectations have been rising around the world.

Rising long-dated interest rates and the ensuing enthusiasm for growth has predictably focused investors’ attention on those sectors that are regarded as ‘interest rate sensitive’. While US 10-year nominal bond yields have been on an upward trajectory for 18 months now, global real estate has underperformed global equities by ~6% since the middle of December last year (when bond yields spiked).

With such divergence in performance and uncertainty about where to for interest rates and inflation, an analysis of the historical impact of rising interest rates on the performance of global real estate is topical and timely. On this occasion, we have analysed the effect of the change in bond yields (outside of direct Fed policy).

The findings from this analysis support the observation that in the short-term, the pricing of global real estate is indeed adversely impacted – especially relative to other asset classes such as global equities. However, the adverse price movement in the short term usually leads to global real estate outperforming in subsequent periods in an absolute and relative sense.

Analysing periods of rising bond yields

Over the past 10 years, there have been five periods of notable rises in the US 10-year bond yield (shaded blue in Chart 3). These periods were:

1. Following the depths of the GFC in late 2008/early 2009;
2. The announcement by the Fed of a second round of quantitative easing (QE2) in October 2010;
3. The ‘taper tantrum’ of 2013, coincidentally when the Fed said it would taper off its QE programs;
4. The announcement by the ECB of its own QE program in January 2015; and
5. The second half of 2016, when globally long-dated treasury yields started rising in response to central banks pulling back stimulus and as the market priced in a Trump victory.

While the sample size is not large and the results far from conclusive, we can observe that in each of these periods global real estate did underperform global equities, with the exception being the period from December 2008 – June 2009 that spanned the lows of the GFC. This is highlighted in the following table.

With an average performance of -11.8% relative to global equities, the initial price reaction of global real estate to rising bond yields does appear adversely impacted, notwithstanding the share price return on average was unchanged.

However, rising inflation or the expectation of rising inflation is good for real estate returns. This is because rental growth is often tied to inflation, as are construction costs. Therefore, higher inflation means higher rent growth, but importantly supply is constrained by higher construction costs, thereby shifting the demand / supply equation in favour of the landlord.

Observing the returns for global real estate 3, 6 and 12 months after a rise in bond yields shows it has performed well in all subsequent time periods in both an absolute and relative sense.

Therefore, while prices react adversely or remain suppressed to the noise of rising interest rates and the expectation of rising inflation in the short term, when the noise settles down global real estate prices have a track record of recovering and outperforming global equities over subsequent timeframes.

How does global real estate perform in periods of rising inflation?

When bond yields are rising relative to real yields, implied inflation is also increasing. This, however, doesn’t always translate into actual inflation, as can be seen in Chart 4.

If, in the short term, share prices react to rising bonds and expected inflation, it would make sense that over the medium/longer term it will be actual inflation that in part influences returns. To better understand this, we have observed in the following table how global real estate has performed in periods of rising inflation (shaded blue in Chart 4).

The average return from global real estate is +3.3%, slightly ahead of global equities at +1.7%. What must also be remembered is that there are many factors at play over these periods that influence price, not just rising CPI.

Longer term relationship between bond yields, global real estate and other asset classes

For a global unhedged investor, the exchange rate can have a significant impact on returns, particularly when making observations over shorter time periods. Analysing longer time periods provides greater perspective, and looks through the influence currency can have on the short term.

For instance, over the two years from 2006-08, the Australian dollar rose from US$0.70 to US$0.98. For an Australian investor in unhedged global real estate or global equities, this would have detracted 40% from total returns compared to a US investor.

However, since 2000 there has been a full currency cycle for the AUD against the USD, ranging from below $0.50 to above $1.10, and is now back to within 10 cents of its level in 2000.

Over the same time the rolling correlation between the change in US 10-year bond yields (inverted) and global real estate has swung from positive (i.e. when yields rise, global real estate prices fall) to negative (when yields fall, global real estate rises). This can be seen in Chart 6.

As the return horizon increases, the volatility in correlation smooths out – while over the long term, throughout a full currency cycle, there is almost no correlation to changes in US 10-year bond yields (-0.07 as per the following table).

Conclusion

Stepping back, what can we make of these observations? In the short term, global real estate prices are negatively impacted by rising bond yields and in almost all cases will underperform global equities. This is what we are witnessing now. However, when the noise settles, global real estate tends to perform well.

When inflation is rising, global real estate returns have in the recent past been modest and slightly better than global equities. However, these short-term observations are influenced by currency.

Over extended periods, the correlation to changing bond yields fluctuates, while over the longer term the correlation is almost non-existent. While there is plenty of noise around a ‘bondcano’ and the ‘end of the bond cycle’, in the long term interest rates do not matter.

By Justin Blaess, Principal and Portfolio Manager

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Justin Blaess

Alpha Fund Managers has awarded a mandate to global listed real estate manager Quay Global Investors, a boutique fund manager partner of Bennelong Funds Management.

The Quay Global Real Estate Fund invests in a number of global listed real estate securities, selecting the best opportunities from around the world, including Australia. It aims to generate a real total return of at least five percent above CPI per annum over five or more years.

Julien Brodie, portfolio manager at Alpha Fund Managers said, “The active nature of the strategy, as well as the focus on risk management and wealth preservation, are particularly attractive for the Alpha Property Securities Fund.

“Our approach is to research and select the best investment managers from around the world, combine them in our diversified portfolios, and actively manage them so that investors don’t have to.

“Our investment philosophy is based on the premise that there are particular investment managers that have the ability to consistently generate ‘alpha’ over the medium to long-term and through all financial market cycles, irrespective of any style bias.

“Quay’s proven ability to successfully and consistently add value over the long term fits well with this philosophy.”

Justin Blaess, portfolio manager and co-founder of Quay, said the mandate award was testament to the strength and calibre of the team and the outperformance of the fund.

“Our strategy has just passed its third birthday, and over three years we have delivered a return of 14.8 percent per annum (net) compared to 9.6 percent for the index1, ahead of our benchmark of CPI +5% per annum.

“We continue to see good opportunities for investors.  Global real estate fundamentals are still generally attractive owing to expanding economies and a general lack of construction post-GFC, limiting supply in certain markets.

“With sectors such as healthcare, manufactured housing, student housing and data storage benefiting from structural growth, we believe global listed real estate offers a number of benefits for investors looking for both capital growth and yield,” Mr Blaess said.

The fund was recently upgraded to ‘recommended’ by Lonsec and was awarded a ‘superior’ rating by SQM earlier this year.

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