2nd Quarter 2011 Commentary
The Fund outperformed its benchmark the MSCI US REIT Index over the quarter. Both sector allocation and stock selection contributed positively to the outperformance. The main contributor to the excess return was stock selection within the Office sector followed by our overweight position in Malls. Within the former sector, Boston Properties rose strongly over the period as did Douglas Emmett. Stock picks among Shopping Centers and Multifamily companies also benefited relative performance as did our underweight to Lodging. While our underweight to the Health Care sector was positive, our stock selection within it detracted from relative returns, with Brookdale Senior Living in particular falling over the quarter.
Portfolio activity was relatively light in the second quarter. We sold down our stake in the US industrial REIT, Prologis, which merged with fellow industrial AMB Property Corp., as well as our holding in the office REIT, Liberty Property Trust.
At the end of the quarter, the Fund was slightly overweight in Office/Industrial and modestly overweight in Malls and Shopping Centers, and Self Storage. In the Apartments sector the Fund was overweight apartments. The Fund reduced its exposure to Canada. Although macroeconomic and operating fundamentals remain healthy, modest earnings growth prospects combined with current valuation levels, have lessened its attractiveness vs. the US. The Fund remains underweight in Healthcare.
The increased attendance at NAREIT’s Investor Forum in June 2011 indicated an increased optimism in the real estate investment market. A common theme in the industry right now is the concept of moving from recession to recovery to growth. Although it is too early to label the current environment a full-on “growth phase”, it is believed to be getting closer. One surprise in the market so far this year has been the relative lack of initial public offerings (IPOs) in the REIT space, although existing REITs increasingly have “at the market” (ATM) programs in place. We have however seen significant multiple expansion in the REIT space, while we have not really seen the earnings growth that the market would like to see. That is all connected back to seeing some better broad economic indicators.
Overall, we believe we will see positive total return on REITs over the next 6-12 months given modest fundamental improvements and the significant levels of equity and debt chasing the REIT space.
Fortis Investment Management
Please note Harrison Street, LLC was appointed as the new Subadviser to the Fund as of June 30, 2011.
As of June 30, 2011, Boston Properties comprised 7.86% of the portfolio's assets, Douglas Emmett – 3.12%, Brookdale Senior Living – 1.65%, Prologis – 4.18%.
Note: Real estate funds are non-diversified and may be more susceptible to risk than funds that invest more broadly. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Investing in foreign markets also entails the risk of social and political instability, market illiquidity, and currency volatility.
Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.