After a very poor 2022 (real estate equities were the worst performing GIC sector), January saw a strong rebound as bond yields showed signs of stabilising and parts of our universe looked oversold. Investor sentiment has definitely changed tack with a renewed belief that the end of the rate tightening cycle will occur in the second half of 2023. Whether this is overly optimistic or not will primarily depend on the stubbornness of wage inflation. Energy price falls are adding to the optimism as is the increased military support for Ukraine.
The Trust’s net asset value (NAV) rose 8.6% during the month while the benchmark rose 8.3%. The share price did not quite keep up, rising 5.7%. There were two clear cohorts of ‘winners’ during the month. Those that were hit hardest in 2022 were either highly leveraged (such as Swedish property companies) or had a very low yielding asset type (residential), where the impact of yield expansion is felt most keenly. The strongest performer was TAG, with a 30% return in one month, as short sellers capitulated amid an expectation that the rights issue has given the company breathing space. Vonovia and LEG both rose 17% as the correlation to the Bund persisted (the 10-year Bund yield fell from 2.50% to 2.28% in January).
The top-performing sector in 2022 was retail owners, which had seen significant write-downs in previous years. Klepierre and Eurocommercial both reported positive total returns in 2022 (when the sector as a whole fell -35%). It is of little surprise that these companies did not participate in the January rally. The major exception was Unibail (+22%), where investors have become increasingly reassured that the company will dispose of its US portfolio, and that it will not require fresh equity. With little near-term refinancing requirements, the scale of the discount to NAV has proved attractive. We are less optimistic given the overall leverage and maintain our underweight to the company. In the UK, Hammerson (+12.8%) was the top-performing retail name. This shows the changing market view on this overleveraged business which, in our opinion, must make sales to prevent the need for fresh equity.
The UK, with its diverse range of companies, was a useful summary of investor focus. Logistics and London Offices did well after being hit hard in 2022. The two large diversified majors also performed well given their strong balance sheets (low loan-to-value ratios) and wide discounts to NAV. The weakest performances came from those focused on long indexed income names, which were trading much closer to asset value as the new year began. Supermarket Income fell -4.8% while LXI was flat, and the healthcare names (Assura and PHP) managed just +2.2% and +2.7%, respectively.
The Trust continues to hold a range of smaller companies, mostly focused on specific sectors. They are all well financed with low leverage and secured debt. At tipping points in the cycle, such as now, investors are focused on buying large caps to regain exposure quickly. As those larger companies’ value rises, the smaller names begin to look cheap on a relative basis and attract buyers. Therefore, there is a lag. The low point for pan-European equities was back in mid-October; the sector enjoyed a 16% rally into year-end before seeing a further rally of the same magnitude (from 1 January to 3 February). We now enter the December year-end results season with investors more optimistic about the future, with the expected fourth quarter of 2022 drop in valuations already factored in.
Discrete rolling annual performance as at 28.02.2023 (%):
| 2023 | 2022 | 2021 | 2020 | 2019 | |
| Fund | -23.74 | 19.79 | -4.60 | 16.06 | 7.12 |
| Benchmark | -23.92 | 11.29 | -7.59 | 11.39 | 3.37 |
| Share Price | -27.10 | 24.87 | -9.62 | 17.94 | 5.05 |
Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of all fees and expenses.