1st Quarter 2013 Commentary - ASTON/Harrison Street Real Estate Fund
1st Quarter 2013
The rally in U.S. equities continued during the first quarter of 2013. Investors shrugged off noise from foreign corners such as Cyprus and the Korean peninsula in pushing equities steadily higher. Domestic economic news, while not stellar, did reflect growing conviction in a housing recovery, job growth, and better consumer sentiment despite the notable dysfunction in Washington D.C. Of course, ‘risk’ assets continued to benefit from the sustained accommodative policies of the U.S. Federal Reserve.
Smaller sized companies in general led the way, but not by much. The small-cap Russell 2000 Index gained 12.4%, followed closely by the large-cap Dow Jones Industrials. The broad market S&P 500 Index rose 10.6%. The laggard among the common indices was the technology and growth stock laden NASDAQ Index, which delivered an 8.5% return. Real Estate Investment Trusts (REITs) trailed them all, however. The Fund’s FTSE/NAREIT Equity REIT Index benchmark gained a more modest 8.1% during the quarter after handily outdistancing the broader equity market since mid-2009.
The Fund lagged its benchmark modestly during the quarter. Notable positive contributions from positions in small-cap Healthcare property owners Sabra Health Care REIT and Medical Properties Trust, along with small-cap STAG Industrial, were offset by lagging performance from hotel operator Orient Express Hotels, data center owner Digital Realty, and large-cap American Tower.
First quarter earnings reports for REITs offered few negative surprises and dividend growth remains robust on a cap-weighted basis. We forecast impressive growth in per share cash available for distribution (CAD) for the year, which should allow for healthy dividend growth across the sector. REITs as a whole recently traded at an estimated 4% premium to net asset value (NAV)—well within the 10% premium/discount bandwidth typical of the sector over extended periods. Given these valuation parameters, coupled with visible external acquisition and development growth plans for many REITs, we believe that the outlook for the REIT sector remains bright.
Equity REITs have demonstrated the durability of their business models in recent years, with the professional management and operation of high quality commercial real estate properties backstopped by sound balance sheets. During the 2008/2009 financial crisis, REIT prices were pummeled amid the tumult as the availability of capital dried up and investors viewed them in the same light as ordinary equities. The cash flows generated by their underlying portfolios of well-leased properties fluctuated to a far lesser extent, however. As investors attained clarity as to real estate market fundamentals and the durability of the cash flow generation potential of REITs, it became clear that the inherent value of owned real estate portfolios were rising and stabilizing. The strong positive returns of REITs since the financial crisis parallel recovering commercial real estate fundamentals and valuations—aided by continuing low interest rates and muted volumes of competing new supply and development.
With the growing awareness of the underlying fundamental strength of REITs, we think the asset class makes a compelling long-term component of any well-diversified portfolio.
Harrison Street Securities
As of March 31, 2013, Sabra Health Care REIT comprised 3.80% of the portfolio's assets, Medical Properties Trust – 2.67%, STAG Industrial – 1.58%, Orient Express Hotels – 1.67%, Digital RealtyTrust – 3.40%, and American Tower – 8.01%.
Note: The Fund is classified as non-diversified and may be more susceptible to risk than funds that invest more broadly. In addition, REITs may decline from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Small- and mid-cap equities are considered riskier than large-cap equities due to greater potential volatility and less liquidity.
Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.