Market and Performance Update
market’s action, while unsettling, has been rational and even expected. Capital markets are attempting to price the risk and uncertainty around the breadth, length and economic impact of this latest shock to the system. The global REIT market has been driven by exogenous factors, notably concern over the global economic impact of the coronavirus. The most immediate impact of the growing spread of the coronavirus is on sentiment. While the number of new infections in the epicenter of Wuhan has stopped, we are seeing pockets of infection appear around the world and this is causing countries to adopt policy measures aimed at containment, but with a cost in terms of sharply reduced economic activity.
It is critical to recognize that the magnitude and duration of impact remain uncertain. What we do know is that there will be a meaningful impact to global economic growth. What we don’t know is the timing and shape of the recovery: Will it be “V” shaped or “U” shaped—or perhaps “L” shaped? That will depend to some extent on the efficacy of coordinated global central bank intervention to address liquidity— which has already begun as evidenced by recent announcements by the U.S. Fed, the BoJ and the BoE. It will also be determined by the size, timing and targeting of fiscal stimulus measures such as the $2.2 trillion (or more) spending package now being rolled out.
The FTSE EPRA/NAREIT Developed Real Estate Index (the “Index”) had a total return of
-28.34% for the quarter, while the James Alpha Global Real Estate Investments Fund (the “Fund”) demonstrated its defensiveness and defensive stock selection by posting a total return of -26.79%, outperforming the Index by 155 basis points.
Portfolio Positioning: One of the Keys to Outperformance
During market downturns like these, when the global REIT market is distracted from fundamentals by exogenous, transitory shocks to the system, a portfolio that is managed with a focus on fundamentals will often underperform its benchmark. Indeed, this has happened several times since the Fund’s inception in 2009. The first such event was S&P’s downgrade of U.S. debt in 2011, then came Greece’s almost exit from the EU along with Russia’s invasion of Crimea in 2014, and then Brexit in 2016. Notably, during each of these three prior episodes, JARIX underperformed its benchmark. The Fund’s outperformance in the recent market sell-off and recovery suggests it is well positioned for the changing market conditions we may encounter going forward.
There are two primary themes that have captured the market’s attention and are creating either tailwinds or headwinds for certain property types and/or specific companies:
- balance sheet strength, as a measure of the company’s ability to manage through a period of reduced revenue and income and still service its debt obligations, along with the absence of any near-term debt maturities that may be a challenge to re-finance with new debt during a time of potential bond market stress; and,
- direct exposure to consumer spending during a period of “social distancing” with most consumers either voluntarily or involuntarily adopting a “nesting” lifestyle, i.e., not only working at home but also staying at home.
With our laser-focus on seeking to identify and own what we believe to be the 50 highest-quality companies in our investable universe of ~550 companies, we employ a holistic approach to assessing a company’s quality—which includes the quality of its balance sheet and resulting financial flexibility to weather a transitory economic storm.
In terms of property types, the Fund clearly benefited from the portfolio’s largest underweight to Retail, which is the most vulnerable to the negative impact of “social distancing.” Likewise, the Fund also benefited from its second-largest underweight to Office, which for many years has seen reduced demand due to densification and is now experiencing an incremental headwind from increased working at home—a change in habits for both employers and employees that we believe will to some extent remain permanent even after the current crisis passes.
Conversely, performance also benefited from the portfolio’s exposure to data centers and cell towers, which are seeing increased traffic due to more people working at home and then staying at home, choosing e-commerce and home delivery over going to the store, restaurant or theatre.
Payment of Q1 2020 Cash Distribution
The Fund’s Q1 2020 distribution was paid on 3/27/20 at $0.32 per share (on the A shares). Note that after paying out the distribution for Q1, a substantial amount of the Fund’s distributable income was retained.
This brings the 12-month distribution yield to 15.45% (30-day subsidize yield: 1.55% and unsubsidized yield: 1.55%),reflecting the disciplined execution of our income-enhancing overlay in an environment that has often been challenging.
Alpha: The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.
FTSE EPRA/NAREIT Developed Global REIT Index: An index whose constituents include publicly-traded real estate investment trusts (REITs) located on both domestic and foreign exchanges in developed countries. The Index includes securities of companies that derived in the previous full fiscal year at least 75% of its total earnings before interest, depreciation, and amortization (EBIDA) from the ownership, trading, and development of income-producing real estate.
Recession shapes: are used by economists to describe different types of recessions. The most used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries (for example, a “V-shaped recovery”).
Upside/downside capture ratio: show you whether a given fund has outperformed–gained more or lost less than–a broad market benchmark during periods of market strength and weakness, and if so, by how much.
Performance as of 3/31/2020
The inception date for A Shares and A Shares (5.75% max load) was October 26, 2009; Inception for I Shares was August 1, 2011. Performance data quoted above is historical. Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. 5.75% is the maximum sales charge on purchases of A Shares. For more performance numbers current to the most recent month-end please call 888.814.8180.
Past performance is no guarantee of future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. The performance shown reflects the waivers without which the performance would have been lower. For Fund performance to most recent month-end, please contact James Alpha Advisors at 888.814.8180. The Fund’s management has contractually waived a portion of its management fees until December 31, 2020 for I Shares, A Shares, C Shares, and S Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.37% for S Shares, 1.37% for I Shares, 1.62% for A Shares, and 2.37% for C Shares; total annual operating expenses after the expense reduction/ reimbursement are 0.99% for S Shares, 1.19% for I Shares, 1.62% for A Shares, and 2.37% for C Shares. Source: Morningstar.com and StyleAdvisor. Annualized returns. Returns include dividends and capital appreciation. Sales charges are not included in analysis. You cannot invest directly in an index. Morningstar is an independent provider of financial information. The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. © 2020 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
1 Ranger Global Real Estate Advisors acts as the sub-advisor to the James Alpha Global Real Estate Investments Fund.
*Inception Date of the A Share is 10/26/2009 and the inception date of the I Share is 8/1/2011
**I Share 10-year performance and ranking shows the A Share performance until I share inception on 8/1/2011 as calculated by Morningstar.
Rankings are only one form of performance measurement. For current performance information, please call toll free 888-814-8180.
About the Author, Andrew J. Duffy, CFA®
Andrew Duffy is the Senior Portfolio Manager of the Global Real Estate Investments Fund (JAREX/JACRX/JARIX/JARSX), a mutual fund that invests in publicly-traded global REIT securities. Mr. Duffy has more than 26 years of global real estate securities investment experience.
Mr. Duffy co-founded Ranger Global Real Estate Advisors, LLC in 2016 and serves as the Chief Investment Officer. Prior he served as the Senior Portfolio Manager with Ascent Investment Advisors. Prior to joining Ascent Investment Advisors, Mr. Duffy was a Managing Director with Citigroup Principal Strategies, where he managed a long/short portfolio of global real estate securities. From February 2005 until January 2008 he was with Hunter Global Investors, L.P. where he was the Co‐Portfolio Manager of the Hunter Global Real Estate Fund, LP. Before that he was a portfolio manager at TIAA‐CREF for more than six years, during which time he was directly responsible for managing more than $3 billion in global real estate equity and debt securities. Between 1993 and 1999, Mr. Duffy was a Senior Research Analyst at Eagle Asset Management, where he launched and managed a dedicated real estate securities investment program.
Prior to his career in investments, Mr. Duffy served for five years as an officer in the United States Army, where his assignments included serving in the 7th Special Forces Group and the 82nd Airborne Division. Mr. Duffy received a BS from the United States Military Academy at West Point in 1979 as a Distinguished Graduate (top 5% of class) and an MBA from Harvard Business School in 1986. He earned the Chartered Financial Analyst® designation in 1996.
Risks and Disclosures
The Fund is subject to stock market risk, which is the risk that stock prices overall will decline over short or long periods, adversely affecting the value of an investment. Risks of one’s ownership are similar to those associated with direct ownership of real estate, such as changes in real estate values, interest rates, cash flow of underlying real estate assets, supply and demand, and the creditworthiness of the issuer. International investing poses special risks, including currency fluctuations and economic and political risks not found in investments that are solely domestic. Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.
Past performance is not a guarantee or a reliable indicator of future results. As with any investment, there are risks. There is no assurance that the portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. Certain members of James Alpha Advisors, LLC are also registered representatives of FDX Capital, LLC, member FINRA/SIPC. Saratoga Capital Management, LLC, FDX Capital, LLC, and Ranger Global Real Estate Advisors, LLC are not affiliated with Northern Lights Distributors, LLC. The Saratoga Advantage Trust’s Funds are distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC. 11/11 © Saratoga Capital Management, LLC; All Rights Reserved.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888.814.8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.SaratogaCap.com or www.JamesAlphaAdvisors.com.
As with any investment, there are multiple risks associated with REITs. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers, to name a few. Please see the prospectus for a full disclosure of all risks and fees.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.