Global real estate stocks were up modestly in the third quarter of 2020, extending the strong but choppy recovery that began in the second quarter as the combined effect of coordinated global central bank support, massive government spending and positive vaccine developments continued to ease concerns over the pandemic’s impact on the global economy. The FTSE EPRA Nareit Developed Index (the “Index”) had a total return of 2.33% for the quarter, while the James Alpha Global Real Estate Investments Fund posted a total net return of 2.28%, slightly underperforming the index by 5 basis points.
Fueled by the continued unprecedented levels of global fiscal and monetary stimulus, global REIT returns were positive in July and August, followed by a pull-back in share prices in September as the macroeconomic and geopolitical uncertainty facing the global economy came into sharper focus. The exogenous risk factors influencing market behavior include:
- The size, timing, and targeting of additional fiscal stimulus
- The outcome of the U.S. election (both the White House and control of Congress)
- The trajectory of the COVID-19 pandemic (including the timeline to a vaccine or herd immunity, and the risk of infection rate upticks necessitating a new round of lockdowns)
- Escalation of the tensions between the U.S. and China
Against this backdrop of episodic market volatility driven by headline risks, real estate fundamentals continue to matter, although less than usual. In this environment, the global REIT market’s attention has been drawn to two primary themes, creating either tailwinds or headwinds for certain companies and/or property types:
- 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.
Consistent with these themes, the global REIT market has effectively bifurcated into two categories: the “haves” and the “have nots” – i.e., some property types are experiencing new and/or increased headwinds as a result of the pandemic, while others are experiencing tailwinds.
Property types that are disadvantaged by the impact of social distancing, including Lodging, Discretionary (i.e., mall-based) Retail, Central Business District (CBD) Office and Senior Housing, continue to experience headwinds as a result of the pandemic. The property types that have been least affected by the virus—and in some cases have even experienced tailwinds—include Data Centers, Cell Towers, Industrial/ Logistics, Life Science/Lab Space, Cold Storage Warehouses, Single-Family Rental Homes, and Manufactured Home Communities.
The Fund’s nimble size and high active share have benefited performance in an environment characterized by the high dispersion of returns by property type. Consequently, our portfolio is not compelled to own large-cap REITs (most of which are in the property types experiencing headwinds), while conversely, we can achieve significant exposure in the mostly mid-cap REITs that have been least affected by the virus or who have seen demand increase as a result of the pandemic.
Over the quarter, the Fund’s stock selection in the Residential sector was a contributor to relative returns, including our overweight position in Homebuilder companies, who have benefited from the increased demand for single-family housing spurred by the exodus from dense urban locations to the suburbs, as households seek more space for social distancing.
Performance also benefited from our well-timed investments in the Lodging sector – where we harvested gains generated by our opportunistic investments in selected blue-chip companies with franchisor/brand-driven business models and “fortress” balance sheets – as well as our overweight of the Towers sector, which has seen increased demand for wireless data transmission driven by the transition to work-from-home policies.
As we look ahead, our base case is that the sharp contraction in economic activity observed during the first half of the year will be followed by a sustained recovery. While the shape of that recovery – whether it will be a “U”, “V”, or “W” – remains uncertain, all three letters do have one thing in common: the right-hand side is a line pointing up. That said, the path and timeline to the recovery will be predicated upon three primary factors:
- The re-opening/back to school surge in new cases is contained by a return to targeted social distancing
- Continued coordinated global central bank monetary policy to provide liquidity and stave off a disruption in the credit markets
- Fiscal policy measures to complete the “cash bridge” during the containment period (i.e., “band-aid” stimulus) followed by true stimulus (i.e., job-creating stimulus)
The trajectory of global REIT prices in the coming months will reflect the market’s fixation on uncertainty and the tension between tailwinds and tail risks, a dynamic that is likely to result in elevated volatility that will create compelling buying and selling opportunities for actively-managed portfolios like the Fund’s.
Our high conviction, benchmark-agnostic investment approach allows us to maintain a laser-focus on identifying and owning only the 50 highest-quality companies in our investable universe. We have unshakeable confidence in our fundamental research, and equal comfort with the management teams of the companies we own.
While the pandemic’s impact will continue to create challenging economic conditions in the near term, our portfolios seek to participate in the recovery as the spread of the virus stabilizes and then recedes and investor attention continues its turn back to fundamentals.
Source: Morningstar Direct. 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. Investors cannot invest directly into an index. The Fund’s management has contractually waived a portion of its management fees until December 31, 2020 for I Shares, A Shares, and C 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 1.34% for I Shares, 1.61% for A Shares, and 2.38% for C Shares; total annual operating expenses after the expense reduction/ reimbursement are 1.20% for I Shares, 1.61% for A Shares, and 2.38% for C Shares. 5.75% is the maximum sales charge on purchases of A Shares. For performance information current to the most recent month-end, please call 888.814.8180.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least December 31, 2020 for I, A, and C Shares, to ensure that net annual operating expenses of the fund will not exceed 1.19% for I Shares, 1.69% for A Shares, and 2.37% for C Shares, subject to possible recoupment from the Fund in future years.
ABOUT THE AUTHOR, ANDREW J. DUFFY, CFA®
Andrew Duffy is the Senior Portfolio Manager of the James Alpha Global Real Estate Investments Fund, a mutual fund that invests in publicly-traded global REIT securities. Mr. Duffy has more than 28 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
There is no assurance that the portfolio will achieve its investment objective. 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.
James Alpha Advisors, LLC serves as the Advisor to the James Alpha family of mutual funds and related portfolios. James Alpha Advisors is a related entity to James Alpha Management, LLC, a New York based SEC-registered investment advisor which invests in emerging managers and their hedge fund and/or mutual funds. Their form ADV can be found at www.adviserinfo.sec.gov. Please consider the charges, risks, expenses, and investment objectives carefully before investing. Please see prospectus, or if available, a summary prospectus containing this and other important information. Read it carefully before you invest or send money. Mutual Funds are distributed by Northern Lights Distributors, LLC. Members of FINRA and SIPC.
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any 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, including all the James Alpha funds, are distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC. 11/11 © Saratoga Capital Management, LLC; All Rights Reserved. Saratoga Capital Management LLC, James Alpha Advisors, LLC, Ranger Global Real Estate Advisors, LLC, FDX Capital LLC, are not affiliated with Northern Lights Distributors LLC.
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.