April 2020

Pan-European broad equities (measured by the STOXX Europe 600 index, in euros) generated total returns of +6.7%. They shrugged off poor corporate earnings releases and dreadful macroeconomic news flow in April, warmed by the enormous central bank and government support actions. Pan-European property stocks (EPRA Developed Europe, sterling, total returns) returned +1.7%, lagging the wider market. This was possibly due to concerns over surging debt spreads, lease length potentially undermined by bankruptcies, dividend cuts, and a worsening outlook for the consumer-facing property sub-sectors, such as retail, hotel, leisure and serviced offices. However, the picture wasn’t quite so bleak when viewed in euros, with total return for the month at +3.7%. Sterling strengthened over 2% versus the euro over the month, carrying on its bounce from the mid-March lows. The Trust’s net asset value (NAV) rose +2.0% while the share price was up +5.5%, as the discount percentage tightened to single figures.

The covid-19 black swan shock ultimately requires a medical solution. Developments in terms of serology testing and therapeutics will be key to help diminish the economic impact of any second wave over the short term and to find a resolution (vaccine), hopefully within 18 months.

In the meantime, we expect the persistently high equity market volatility to stay and be punctuated by brutal style rotation ‘junk rallies’, driven by incremental progress on the pharmacological front. This comes at a time where value/cyclicals stocks have never been so cheap relative to quality/growth stocks, which have never been so expensive.

For our universe, April was a very tricky month for stock selection, with few clear performance patterns. There were dramatic rallies for many of March’s worst performers – but not for all of them – and this was accompanied by a large number of stocks fading towards month-end. It was quite possible to be suckered in and then feel foolish.

To put things into context, URW (Unibail-Rodamco-Westfield), previously the largest listed property company in Europe, returned -68% since December 2017, but this negative performance was dominated by an extraordinary return of -49% in March 2020 alone. At such a distressed level, the stock now trades like an option and is susceptible to violent rallies, such as the phenomenal four-day performance of +44% during the Easter week. Intellectual honesty suggests that it is increasingly academic to opine about URW’s valuation at its share price trough of €45 on 3 April (-78% discount to NAV to its last reported NAV of c. €200)), compared to €66 (a -67% discount to NAV) four days later. It becomes more an alpha preservation / risk management decision.

We have maintained our approach of favouring those businesses with longer and stronger income streams in sectors which had a broad supply/demand balance before the pandemic. Our largest exposures are therefore to residential (primarily Germany), logistics and industrial, offices in Paris, Stockholm and across Germany, as well as healthcare and supermarkets (UK, France and Finland). However, most of these sub-sectors did not outperform in April, and in fact eight out of the top ten performers in the month had exposure to consumer-facing tenants – retail, hotels, leisure and restaurants.

Encouragingly, we saw some companies taking advantage of stabilising markets in April to raise equity to finance growth: Aedifica (nursing homes), Supermarket Income REIT (food retail), Big Yellow (self-storage) and VGP (Logistics). The Trust participated in the raises from Aedifica and Big Yellow. As very large holders of Supermarket Income REIT, we were pleased to see the raise oversubscribed.

We expect the performance dispersion at the sub-sector and stock-level to remain elevated. Therefore, we will continue to monitor our exposures very actively and probably sustain a portfolio activity higher than the historical average.

Full-year results will be announced on 29 May, along with the Board’s recommendation for the final dividend.