Portfolio Manager Interview

by Joanna Ong, Investment Solutions Team, Eastspring Investments

06 Aug 2020

Joanna Ong joined Eastspring Investments in June 2000 and is a key member of the dedicated multi asset Investment Solutions team managing global multi asset funds for Prudential plc across Asia, as well as external investment strategies.

The Eastspring Investments – Asia Real Estate Multi Asset Income Fund (“Fund”) was launched in December 2019 for investors to participate in the sector’s fast growing potential. In this interview, Joanna shares the Fund’s unique approach and
addresses the concerns and challenges of investing against the COVID-19 backdrop.

1. To access real estate, clients can invest in REITs, property stocks or physical property directly. What is the benefit of investing in this Fund?

Using a multi-asset strategy to invest in Asia Real Estate allows us to express views across a variety of building blocks: real estate developer equities, REITs, high yield bonds, investment grade bonds, listed infrastructure, and currencies. We can invest across the property eco-system based on our views of where valuations, fundamentals, and technical signals indicate the most promising opportunities. This way, we can derive the diversification benefits across countries and sub-industries and tap into the growth in super cities not just in China, but across smaller markets like Philippines, Indonesia, India, etc. At the same time, we can specifically construct the portfolio to maximise income with lower volatility.

It is not just emerging Asian economies that are presenting interesting opportunities across the real estate sector. Singapore is a well-established market for property companies with 39 listed REITs and 66 listed developers⁴ providing access to certain long-term trends that will continue to transform the way we live and work, including flexible work spaces, multi-use developments, warehousing and distribution centres, data centres, medical facilities, residential housing and more.

By investing in this Fund, investors can immediately enjoy the benefits of the Asian property segment without the constraints such as high barriers to entry in buying a physical property (and also barriers to exit). Moreover, with this Fund, investors can own a more liquid investment, unlike a direct property which is not as easily or quickly sold on demand.

Further, property dynamics vary across markets and focus on the domestic real estate market cycle in which they operate. It takes expertise to truly understand the unique nuances and structural growth dynamics in the nearly one dozen markets in
which we invest.

Hence, our presence in 11 Asian markets is a competitive edge we offer with regard to local insights and investment opportunities. Our team is experienced (since 2006 on the equity side and since 2011 in fixed income) investing in Asia’s leading property companies.

2. Why consider this Fund over others?

The property sector is the ultimate play on the Asian consumer be it the rise of the middle class, the millennial bulge or ageing populations. Equally, Asia’s continued urbanisation and large populations will force governments to spend on basic infrastructure needs such as housing, schools, hospitals, etc. Real estate stands to be a key beneficiary.

Besides, tech disruption is creating new opportunities and challenging traditional models. We have the underlying building blocks to construct a diversified portfolio to capture the exciting growth and income in the property space as co-working (office space), ridesharing (data centres) and e-commerce (warehousing) trends disrupt traditional ways of doing business.

This Fund is a multi asset strategy, meaning that it invests across the capital spectrum of companies, including their equity and debt securities. Some companies may present better opportunities to bond holders, while for others it’s the equity that looks most attractive. While this is true for all multi asset funds, this Fund is the only Asian multi asset strategy that remains underpinned by this key long-term growth theme, real estate. Asian property has been a key source of income for many wealthy investors and this Fund will allow more investors who are not able to acquire buy-to-let properties to generate sustainable income from Asian real estate.

3. What is the Fund’s investment process and how does the Fund’s allocation change in a bull or bear market?

The Fund brings together the best of what Eastspring has to offer; its highly experienced Investment Solutions, real estate equity income and Asian fixed income teams into one focused portfolio. The Fund is managed by the Investment Solutions (IS) team who make the asset allocation decisions between bonds and equities. The IS team uses a proprietary “Balance
of Indicators” model which guides asset allocation across core asset classes. The Fund’s asset allocation, be it in a bear or bull market, is driven through the quantitative screening of thousands of economic and market indicators with an experienced team of senior portfolio managers interpreting and reviewing the output and making the primary allocation between listed equities and fixed income, along with other tactical asset allocation inputs. Security selection in the equity sleeve is driven by our equity income team and in the bond sleeve by our fixed income team.

4. How has the fund performed since inception and YTD with the COVID-19 situation? What is our strategy given the current market situation is likely to persist?

The Fund’s objectives are to generate a yield of 5-6% by investing in listed equities and bonds of developers, REITs and infrastructure operators while delivering lower volatility than the Asia Pacific REIT Index. The comingling of bonds and equities, along with the regional diversification, have helped the Fund deliver volatility levels that are substantially lower than the comparative REIT Index. Since inception volatility to end June 2020 for the Fund was 16.7% versus the broader REIT Index of 42.3% (based on MSCI Asia Pacific ex Japan REIT Index from 9 December 2019 - 30 June 2020). The Fund’s worst peak to trough drawdown during the Covid crisis was -26% versus 44% for the broader REIT Index as above. The
Fund was impacted by the Covid crisis but has since managed to recoup the majority of its draw down to finish the YTD period -11.4% versus -21.6% for the broader REIT Index. The current running yield is approx. 5.7% as at 30 July 2020.⁵

Over the first half of 2020 we adjusted our portfolio as the crisis unfolded, reducing exposure to equities down to the lower limit of 40%. Since the recovery we have been able to add back to risk quickly increasing our equity exposure to 52% to capture the market recovery as stimulus measures and central bank easing helped reflate markets. Within the equity portion
of the portfolio we reduced exposure to retailers and added to logistics and warehousing properties that are beneficiaries of rising e-commerce trends. We also focused on well managed, diversified REIT names in Singapore that have a mix of both suburban and CBD office exposure. SREITS have been poor performers during the crisis but we believe the Covid risks have now been priced in. In our bond portfolio we maintained our exposure to China developers – whose offshore USD bonds sold off during the crisis – but as China recovered from Covid quickly, real estate activity was one of the sector leaders in the recovery. We also held exposure to infrastructure bonds which were mostly defensive during the market correction.

We expect the market to gradually recover following the worst effects of the Covid-19 crisis. There may be second or even third rounds of Covid waves that hit certain countries, causing localized responses, but we don’t expect the major economies like China, Japan or Australia to go into nationwide lockdowns again. Containment will be likely be focused on
neighbourhoods, cities or even provinces/states. Additional stimulus benefits through low interest rates are likely to persist for the next 18 months and this is positive for the real estate sector. We remain focused on quality businesses that can weather the storm and come out stronger. Going forward we expect consolidation in the Asian real estate sector, especially in China, where the Government has made it clear they want to see fewer developers that can become national champions. Those companies that have access to both onshore and offshore funding remain at an advantage.

5. Is it still a good time to invest in the Fund now and why?

The outlook may feel uncertain as long as the Covid virus remains. A likely scenario is that either a vaccine is found sometime in 2021 or that the virus naturally burns itself out in the population. Either way, uncertainty and volatility are likely to remain a feature of all markets through to the end of the year. The combination of ultra-low interest rates, unprecedented fiscal and monetary stimulus measures pumped into the global economy, and gradually recovering global growth should
support the outlook for the real estate sector in the coming years. Investors seeking income may need to increasingly look to yields from real estate as Government and some corporate bond yields remain at multi-year lows. The real estate sector
valuations are trading well below their 5-year averages (current 12m Fwd PE is 8.7x against its 5YR Average of 11.3x)⁶ and equity yields averaging 4.7% are obtainable with average bond yields even higher.

6. What is the outlook on Real Estate?

Our outlook remains positive for the rest of this year. We remain overweight real estate equities versus bonds and despite the Covid-19 crisis and its initial hit to select rental incomes in 1H 2020, dividends and returns have begun to recover over
the summer. The flood of central bank liquidity and the ultra-low interest rate environment are likely to support asset prices into 2021 and will drive investors to search for sources of income beyond lower-yielding Government and corporate bonds.

There will, of course, be winners and losers in the post-Covid real estate environment. Covid-19 has served to accelerate trends that were already in play – the most obvious of which are e-commerce and working-from-home. We expect logistics
and warehousing to do well along with suburban shopping malls and office parks as the focus of shopping and office working becomes more fragmented. High quality Grade A office space in the CBD will always be in demand in markets
like China, Singapore and Japan. Social distancing measures may mean companies need to reconfigure work spaces to allow workers to return to the office, which initially may mean more space required per employee. We have also seen trends for multinational tenants to diversify their office space across multiple locations to strengthen Business Continuity Planning (BCP). Shopping malls and accommodation properties dependent on foreign tourism traffic – along with large convention
properties – are likely to remain under pressure until the lifting of travel restrictions. All in all, we believe we are well positioned to capture the changing trends in Asian real estate and security selection will remain key for the remainder of this year and into 2021.

7. What are the risks that we should be mindful of now and what keeps you awake at night?

Risks remain to the nascent recovery in the Asian economy. The primary near-term risk is a second or third round of Covid-19 case transmission across multiple jurisdictions. We have seen nearly every economy impacted by second rounds of transmission following reopening. In these subsequent Covid phases, more localised lockdowns are likely to reduce the widespread damage to economies that we witnessed in March and April. Hospital ICU capacity will remain one of the key measures to determine how countries are handling the pandemic and how severe their secondary Covid-responses become. Another risk remains the escalating trade tension between the US and China. Tit-for-tat consulate closures and
the US constraining market access for some of China’s technology champions has not yet derailed China’s commitment to purchase agriculture goods from the US under phase one of the US-China trade agreement. In fact, July saw China’s
largest ever purchase of US corn stocks. Any significant unwinding of recent trade agreements or confrontations in global hotspots would be a major cause for concern.

Sources: 

¹Distributions are not guaranteed and may fluctuate. Past distributions are not necessarily indicative of future trends, which may be lower. Historical
distribution payouts and its frequency are determined by the Board of Directors, and can be made out of (a) income; or (b) net capital gains; or (c) capital of the
Fund or a combination of (a) and/or (b) and/or (c). The payment of distributions should not be confused with the Fund’s performance, rate of return or yield. Any
payment of distributions by the Fund may result in an immediate decrease in the net asset value per unit.

²Based on Eastspring Investments volatility measure.
³Latest available data from Bloomberg, data as of 22 January 2020, based on country of listing.

⁴Bloomberg, 22 January 2020.

⁵Eastspring Investments (Singapore). 30 June 2020.

⁶Refinitiv, 3 Aug 2020.

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Eastspring Investments (Singapore) Limited is the appointed Singapore Representative and agent for service of process in Singapore. This advertisement has not been reviewed by the Monetary Authority of Singapore.

The Fund is a sub-fund of Eastspring Investments, an open-ended investment company with variable capital (Société d’Investissement à Capital Variable or SICAV) registered in the Grand Duchy of Luxembourg, which qualifies as an Undertakings for Collective Investment in Transferable Securities (“UCITS”) under relevant EU legislation. The Management Company of the SICAV is Eastspring Investments (Luxembourg) S.A., Grand-Duchy of Luxembourg.

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