May 31, 2024
Commentary
Monthly Update
Year-to-date to May 31, the Ninepoint Global Real Estate Fund generated a total return of -1.62% compared to the MSCI World IMI Core Real Estate Index, which generated a total return of -0.07%. For the month, the Fund generated a total return of 2.21% while the Index generated a total return of 2.48%.
Ninepoint Global Real Estate Fund - Compounded Returns¹ As of May 31, 2024 (Series F NPP132) | Inception Date: August 5, 2015
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|
Fund |
2.2% |
-1.6% |
-3.2% |
3.8% |
1.1% |
-0.5% |
2.6% |
5.6% |
MSCI World IMI Core Real Estate NR (CAD) |
2.5% |
-0.1% |
1.1% |
6.5% |
9.4% |
-0.1% |
0.3% |
2.9% |
Despite a wobbly week to end the month, the markets recovered nicely in May from the mild correction experienced in April. As we had alluded to in our previous commentary, equity investors should be prepared for 4% to 6% corrections at any time during a normal year and they don’t typically lead to anything more significant. It was a bit of a wild ride, but we hope most investors were able to endure the volatility. From our perspective, owning a well-diversified portfolio makes the swings easier to stomach. When all was said and done, after dropping 4.2% in April, the S&P 500 bounced 5.0% in May and hit a new all-time high during the month, which should bode well for the balance of the year.
If the April correction was triggered by fears of stalling disinflation, thankfully we seem to have reached peak hawkishness for the year. The FOMC meeting on May 1 was relatively straightforward, without any signs that the Fed was becoming more uncomfortable with the change in prices paid and therefore the path of interest rates remains lower from here. Further, most of the economic data reported during the month was less scary than some of the data from earlier in the year, with US CPI increasing 0.3% in April compared to 0.4% in March and increasing 3.4% over the last twelve months ended in April compared to increasing 3.5% over the last twelve months ended in March. Finally, the PCE price index (the Fed’s favourite measure of inflation) was up 0.3% and excluding food and energy was up only 0.2% in April, again moving in the right direction from the March numbers. From the same month a year ago, the PCE price index increased 2.7% and excluding food and energy increased 2.8% from one year ago in April, which should put fears of resurging inflation at bay.
The average US consumer also seems to be in reasonably good shape, with the current unemployment rate at 3.9% in April, still within the range of 3.7% to 3.9% that has been in place since August 2023. However, we are starting to see signs that the low-end consumer is coming under pressure, given some of the financial results and commentary out of certain consumer discretionary companies (think QSR restaurants and food & general merchandise retailers), but this is the inevitable result of over two years of progressively tighter monetary policy. We take comfort in the fact that recent commentary from the Fed has been much more balanced in terms of acknowledging the risks in the economy considering their dual mandate of price stability and maximum employment.
We expect that the inflation data will gently but steadily trend lower through the summer and into the fall, as owner equivalent rent increases soften to match what we are seeing in the commercial real estate sector, auto insurance price hikes normalize in conjunction with weaker new and used car pricing, and gasoline prices stabilize along with the price of crude oil.
Earnings results during the first quarter of the year have also been supportive (especially after the valuation reset in April) with blended revenue growth of 4.2% (the 14th consecutive quarter of revenue growth at the index level) and blended EPS growth of 5.9% (the highest year-over-year quarterly earnings growth rate at the index level since Q1 2022). Although this shouldn’t really be surprising, analysts are confident about the future and are currently forecasting revenue growth of 5.0% and EPS growth of 11.3% in 2024 and revenue growth of 5.9% and EPS growth of 14.2% in 2025. After the bounce last month, the S&P 500 forward multiple has expanded from approximately 19.9x at the end of April to approximately 20.3x today, with Information Technology at 28.3x and Consumer Discretionary at 23.5x the mostly richly valued while Energy at 12.0x and Financials at 15.0x the most modestly valued.
We expect that the inflation data will gently but steadily trend lower through the summer and into the fall, as owner equivalent rent increases soften to match what we are seeing in the commercial real estate sector, auto insurance price hikes normalize in conjunction with weaker new and used car pricing, and gasoline prices stabilize along with the price of crude oil. Just a little bit of good news on the inflation front should encourage the market to move rate cut expectations back to at least two for the year, with the US 10-year bond yield falling commensurately. Thankfully, Chairman Powell still seems comfortable with allowing inflation to trend lower over an extended but reasonable time horizon and has clearly stated that rate cuts must happen before the 2.0% target is reached, otherwise real interest rates would become too restrictive as inflation falls.
Our outlook for the equity markets is positive over the balance of the year but the path still depends on two different scenarios. If we get fewer rate cuts than currently expected because growth, inflation and employment remain robust, mega cap growth should regain leadership and outperform but if we get more than two cuts, the rally should broaden as growth reaccelerates across other sectors. In either case, the recent equity market correction has likely offered investors a nice opportunity to upgrade their holdings at better prices. As always, we are continually searching for companies that are expected to post solid revenue, earnings and dividend growth but still trade at acceptable valuations today.
Top contributors to the year-to-date performance of the Ninepoint Global Real Estate Fund by sub-industry included Health Care REITs (+161 bps), Real Estate Management & Development (+77 bps) and Specialized REITs (+36 bps), while top detractors by sector included Industrial REITs (-269 bps), Retail REITs (-22 bps) and Residential REITs (-22 bps) on an absolute basis.
On a relative basis, positive return contributions from the Health Care REITs (+84 bps), Real Estate Management & Development (+72 bps) and Office REITs (+33 bps) sub-industries were offset by negative contributions from the Industrial REITs (-180 bps), Residential REITs (-71 bps) and Retail REITs (-33 bps) sub-industries.
We are currently overweight Specialized REITs, Health Care REITs, and Health Care Providers & Services while underweight Real Estate Management & Development, Diversified REITs, and Office REITs. As we get closer to the first interest rate cut of the cycle, we continue to expect a rotation into undervalued equities more aligned with our dividend-focused mandates in 2024. In the meantime, we remain focused on high quality, dividend paying real estate assets that have demonstrated the ability to consistently generate revenue and cash flow growth through the business cycle.
The Ninepoint Global Real Estate Fund was concentrated in 28 positions as at May 31, 2024 with the top 10 holdings accounting for approximately 44.1% of the fund. Over the prior fiscal year, 17 out of our 28 holdings have announced a dividend increase, with an average hike of 0.7% (median hike of 2.8%). Using a total real estate approach, we will continue to apply a disciplined investment process, balancing valuation, growth, and yield in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA
Ninepoint Partners