In favour / out of favour

Neil Birrell

Premier Miton's Chief Investment Officer
Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified fund range discusses how an asset class that looks great value for the long term can be out of favour in the short term.

Periods of dislocation in economies and financial markets can cause asset prices to move in such a way that extreme levels are reached. The last few years have provided many examples of that and we may be in the midst of another asset class moving to levels that are rarely seen, and I don’t mean currencies; sterling in particular. Although there is a comment on a slight change of view on that at the end of this.

For the purposes of this note, the In Favour and Out of Favour elements are mashed together, as that is exactly what’s happening in the markets.

In favour; property companies (for the long term).
Out of favour; property companies (in the short term)

Over the long term, the share prices of property companies and their valuations reflect the underlying asset class; physical property. We believe the asset class provides the opportunity for good returns over the long term and good diversification for the funds. As ever though, we don’t take a blanket approach, there are specific areas that look more attractive which include; energy efficient offices, industrial property such as logistics, German and Nordic residential, UK convenience and European prime retail, as well as specialist companies.

The sectors and companies within them have good long term prospects in our view. Furthermore, many lease agreements have inbuilt inflation linked rent increases, which should be a good thing in this environment. However …… inflation accelerated to economically damaging levels, a sharp rise in energy prices is a problem and a recession of some sort looks inevitable. This has had a negative impact on real estate; the underlying market has frozen due to the uncertainty on the outlook for inflation and borrowing costs. In essence, the long term fundamentals and “positive” impact of inflation have been drowned in a tsunami of concern over weakening economic conditions.

There is little chance that real estate can avoid the impact of a recession, but remember, it is no different to any other asset class; prices discount future expectations, whether they are right or wrong. For the Diversified funds, our universe is REITs and listed property companies in the UK and Europe, covering businesses developing, converting, or managing real estate of all types. Physical property is illiquid, whilst listed companies are traded daily on stock markets, making them very liquid. This means that whilst their share prices reflect the physical property market over the long term, they can, and do, behave like equities in the short term and investors take advantage of their liquidity.

This has meant that, in aggregate, on some estimates, share prices have moved out to a discount to Net Asset Value (NAV) that has only been seen twice before; during the deep recessions of the early 1990’s and the global financial crisis. That would suggest a lot is in the price.

But what will cause the discount to narrow? Firstly, if NAVs hold up better than expected, share prices will take that well. Any evidence that inflation is slowing, or when interest rates may peak will be a plus point. There will be property transactions taking place, as there is significant demand in many sectors; if they take place at good prices, shares will react.

To conclude; the short term outlook is grim, property company share prices have fallen a long way and are trading near historic lows versus NAV, so, arguably discounting that, the economic situation will improve at some point and there are potential catalysts for share price recovery. We like the asset class and are focused on more attractive sub-sectors and high quality companies. We are willing to take short term pain to stay in the game for the long term gain! That’s what multi asset investing is all about; we have other assets that are doing well.

A little bit less out of favour; sterling

As I sat writing this, an alert came up on my phone from the FT noting that sterling had fallen to below US$ 1.14, the lowest since 1985.

If you have read these notes in the past you will know that sterling has been “out of favour” with us for some time. It has been the right call. We have considerable non-sterling exposure across the fund range, with the biggest being the US dollar.

Given the scale of the moves, we have just started hedging the US$ exposure; in essence that means we have locked in some profit. With the portion we have hedged, we will not profit further if sterling falls further against the dollar, but we will not lose if sterling rises. For now, we have hedged 33% of the exposure and will increase that into further sterling weakness. To us, that is a prudent move as we approach such levels.

How would you rate the information in this article?

Click on a star to rate it.

We are sorry that this post was not useful for you.

Write your comments here:

Tell us how we can improve this post?

Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Property values can rise and fall sharply depending on the strength of a country’s economy.

A hedge is designed to offset the risk of another investment falling in price. It can also act as a limit on potential gains if the investment that has been hedged increases in value.

Some of the Diversified funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.

Future forecasts are not reliable indictors of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund range’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion is issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

007362/210922

Stay up to date

Sign up to receive the latest articles straight to your inbox

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

The content you are trying to access is intended for investment professionals only.

Please use the button below to return to the hompage.

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >