Since mid-July this year, the property sector has experienced one of its strongest recoveries since the pandemic, delivering a notable upswing just as global equity markets faced a sell-off. This rebound has underscored the diversification benefits that property can bring to a portfolio, providing stability during periods of equity market volatility. IBOSS was significantly underweight in property throughout 2022 and 2023, but February 2024 marked what we identified as an attractive entry point.
Our decision earlier in the year has made us well-placed to benefit from the recent rally but what are the driving factors behind this resurgence, and with interest in the sector returning will property’s renewed strength continue to add value as part of a balanced investment strategy?
Asset Class Performance > 01/11/2023 – 13/09/2024
Comparing Infrastructure and Property
From September 2015 to October 2022, the infrastructure sector consistently outperformed the property sector. For most of that period, our exposure to infrastructure was through broader sectors such as the IA Global category.
UT Infrastructure versus UT Property – Relative Performance Line Chart
However, in early 2020, we made a rare adjustment to our core asset allocation, redefining ‘property’ to include dedicated infrastructure funds. This was in addition to the existing allocation through broader funds.
Over various periods, these two sectors generally move in tandem, but they can diverge significantly, especially in the short term. The three-year correlation between them stands at 0.87, which is higher than any other asset class correlation.
3-Year Correlation Table > 31/08/2021 to 31/08/2024
Shifting View on the Property Sector
Our view on the property sector has shifted due to several factors. Property values have suffered significantly from the negative post-pandemic landscape, compounded by the fastest and steepest rise in interest rates in a generation. Almost every factor was a headwind for property during this time. Even before the pandemic, retail had been under pressure for years, with online shopping continuing to gain an increasing share of the market.
Every asset class eventually reaches a point where almost all the bad news is priced in. While market timing is notoriously difficult, we’ve often found that assets with a sound structural risk/return profile can be rewarding with patience. However, patience is rare in today’s markets, where investors typically chase whatever is performing well. The longer an asset performs strongly, the more investors are inclined to buy more of it. Currently, large US growth stocks remain the preferred asset class, with significant allocations from retail investors and asset managers alike, many seemingly indifferent to price. In contrast, property has been in the opposite position, underperforming and continuing in a selling cycle until recently.
Interest Rates: A Key Headwind for Property
The primary headwind for the property sector has been the rapid and steep rise in global interest rates. Central banks misjudged inflation throughout 2021 and spent the following two years playing catch-up, eventually admitting they didn’t fully understand how inflation manifests. Despite this reluctant and somewhat unnerving mea culpa, the world and his dog still hang on every word from the central banks. Most recently, the Fed cut rates by 50 basis points—a move that had been the subject of much debate. However, it’s not the individual rate cut that matters, but rather the broader direction of interest rates and any significant shifts in economic data trends.
Cautious but Opportunistic Approach
We remain acutely aware of the ongoing risks to both the property and infrastructure sectors. Our decision to increase allocations is not based on a strong bullish view, but rather reflects an improved risk/return profile, leaving us less bearish. One reason for our continued caution on assets benefiting from lower interest rates is our concern that inflation could return, possibly as early as the second half of 2025.
In terms of how we are positioning within the property sector, the IBOSS Core medium risk portfolio now has a 6% allocation to property, and we expect to increase that to 7% in the coming months. We’ve also recently shifted towards using more active funds; almost two thirds (63%) of active global property managers have beaten their benchmarks over the past five years, and there are not many sectors where you can say that.
Specifically, the active funds we currently use are Schroder Global Cities and CT Global Real Estate Securities. These funds have different geographical focuses, and current conditions should favour talented active management. We chose Schroders’ due to their extensive resources, experience and pedigree in property, as well as the fund’s consistently strong track record. Meanwhile, CT Global Real Estate Securities has a reasonable allocation to Asian markets, whereas many property funds focus solely on developed markets. The Asia portion of the fund is managed passively, whereas the European and North American segments are actively managed by the experienced Marcus Phayre-Mudge. Combining passive and active approaches within one fund provides broad and diverse market coverage in a sector where maintaining sufficiently diversified assets can be more challenging.
Inflection points like the one we are experiencing often present opportunities to search out alpha, but as always, we will closely monitor performance in this competitive environment. Given the current market dynamics and the historical resilience of property, we see continued growth potential in the property sector and are optimistic about its role in a diversified investment strategy going forwards, especially in times of market uncertainty.
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IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
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