4th Quarter 2012 Commentary - ASTON/Harrison Street Real Estate Fund
4th Quarter 2012
U.S. equity markets were buffeted throughout the final quarter of 2012 by the apparent financial stress centered on the so-called “fiscal cliff” political drama. Emotions and stock prices waxed and waned to the mumblings of Washington D.C. Fundamental news seemed to matter less to market expectations than the collective suspension of corporate decision-making induced by gridlock and directionless Federal legislative and fiscal agendas.
Large-capitalization stocks backed off, while small-caps fared better. The S&P 500 Index slipped slightly during the quarter, but ended 2012 with a full year return of 16%. The small-cap oriented Russell 2000 Index advanced a modest 1.9% during the quarter and finished 2012 roughly on par with the S&P 500. Thus, for all the hand wringing, 2012 turned out to be a pretty good year for equities.
Equity real estate investment trusts (REITs) more than held their own during the quarter and the year in besting the above indices. The Fund’s FTSE/NAREIT Equity REIT Index benchmark rose roughly 3% during the quarter and nearly 20% for the year. We think the performance of REITs reflects their durable underlying contractual cash flows, sustained access to attractively priced capital, rising occupancy levels and stabilizing rents, and consistent dividend hikes. Although REITs generally trade like equities, which they are, in the short run, we believe their simple, transparent, real estate ownership structure over longer time spans (i.e. the multiple years in a typical real estate cycle) deliver total returns akin to commercial real estate returns. In recent quarters, REIT returns have been augmented by their ability to productively invest a growing quantity of retained cash flow as well as develop additional properties, at yields well above their blended cost of capital.
The Fund itself performed in line with its benchmark during the quarter, while besting it by a decent margin for all of 2012. Positive factors for relative performance during the quarter came from large-cap holdings such as cell-tower owner American Tower and timber landlord Weyerhaeuser. Small-cap health care property owners Sabra Health Care REIT and Medical Properties Trust also continued to contribute. These performances helped to offset performance drags from the likes of New York City office REIT SL Green and data center owners Digital Realty and Dupont Fabros.
We think the REIT sector as a whole has the potential to grow and generate excess cash for distribution through further dividend increases. The sector recently traded at a modest discount to calculated 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, we believe REITs can continue to generate healthy returns for investors in 2013.
Harrison Street Securities
As of December 31, 2012, American Tower comprised 8.24% of the portfolio's assets, Weyerhaeuser – 4.78%, Sabra Health Care REIT – 2.24%, Medical Properties Trust – 3.65%, SL Green – 5.10%, Digital RealtyTrust – 2.99%, and DuPont Fabros Technology – 1.77%.
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.