2nd Quarter 2012 Commentary - ASTON/Harrison Street Real Estate Fund
2nd Quarter 2012
REITs Post Gains Amid Market Turmoil
The upward trajectory for the domestic equity market hit the pause button during the second quarter. The Federal Reserve’s explicit pledge to sustain accommodative monetary policy broadly, and a low interest-rate environment specifically, apparently proved insufficient to ward off largely international economic pressures and fears of slowing global economic growth. The “Euro crisis” intertwined with a hard line position on the part of the German government, perceptions of slowing Chinese economic expansion, Jamie Dimon’s missing billions, and nascent evidence of a slowing domestic economy collectively conspired to pressure equities globally, the U.S. included.
U.S. financial stocks (as measured by the S&P 500 Financials Index) performed poorly, losing ground and reversing their strong 22% total return during the first quarter. Although equity Real Estate Investment Trusts (REITs) constitute an important sub-sector of financials, REITs fared better during the period with the Fund’s FTSE/NAREIT All Equity REIT Index benchmark gaining 4%. All told, the REIT sector was one of the top performing areas for the first half of 2012, as a number of broader equity indices reversed course during the second quarter.
Despite a solid April where it outperformed, the Fund ultimately lagged its benchmark during the second quarter. Positions in mid-cap data center operator DuPont Fabros Technology and New York City centric office landlord SL Green Realty aided early returns. By May, however, relative performance in a handful of holdings started to drag. Small-cap skilled nursing owner Sabra Health Care and triple net lease theater owner Entertainment Properties Trust lagged, while out-of-index Wynn Resorts hurt performance as well.
June was essentially a push as positive holdings in healthcare and data centers were offset by holdings in apartment-related REITs. Sabra rebounded, recouping its underperformance from May, and large-cap holding Ventas benefitted from the surge in healthcare as well. The two apartment holdings that detracted from performance were UDR and Apartment Investment & Management Company. Despite the modest underperformance during the quarter, the Fund still remained comfortably ahead of the index for the year-to-date through the end of June.
Given current and probable sustained access to attractively priced debt and equity capital, we think the REIT industry is poised for appealing growth and total returns. Access to capital affords accretive investment opportunities in acquisitions and pre-leased development, while firming rental rates and rising occupancy levels bolster per share cash flow growth. The visibility and trajectory of REIT cash flows generated by their professionally managed portfolios of high-quality commercial real estate have been materially enhanced during the past three and a half years as the industry reduced debt levels, extended debt durations while reducing interest costs, and supported the sector’s financial strength. Investors have taken notice as the equity REITs have performed well in absolute and relative (to broader equities and private commercial real estate portfolios) terms. This is reflective of broader commercial real estate trends and sector specific financial metrics—since the financial crisis and across more complete real estate cycle time frames.
Harrison Street Securities
As of June 30, 2012, DuPont Fabros Technology comprised 3.10% of the portfolio's assets, SL Green Realty – 5.07%, Sabra Healthcare – 2.63%, Entertainment Properties Trust – 1.91%, Wynn Resorts – 1.52%, Ventas – 7.86%, UDR – 3.53%, and Apartment Investment & Management – 3.73%.
Note: Small- and mid-cap stocks are considered riskier than large-cap stocks 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.