No question that it’s been rough-and-tumble times for equity investors everywhere lately, but it comes as no surprise for Chip McKinley, a portfolio manager of the global real estate portfolio at Cohen & Steers, Inc. in New York City, NY, sub-manager of CIBC Asset Management Inc.’s Renaissance Global Real Estate Fund. As a result, he was prepared for the worst of the recent market carnage.
“The past few days have been very volatile, and mostly negative – it’s actually been volatile for the last few weeks – and it was precipitated by the Chinese government’s decision to devalue their currency,” says McKinley. [This move] set off alarm bells around the world, because it was seen as a sign that things are not as healthy in China as the government was telling everyone.
“That set off a ripple effect in every country with close trade ties to China, which means most of Asia,” McKinley adds. “The thinking is that if China is in trouble, that means problems for all the developing countries in Asia, and problems for the U.S. as well, so the capital markets want out of Asia.”
Anticipating China fallout
McKinley saw it coming early in 2015, though. “We’d been getting more and more nervous about Asia,” he recalls. “We’d been anticipating problems, so we’ve been selling Asia and bringing the capital back to the U.S. At the beginning of the year we were 11% underweighted in the U.S. and bullish on Asia, and that worked well for the first months of the year.
“But then the U.S. started looking good – the fundamentals were looking very good, companies were cheap, and now we’re overweighted in the U.S. [with more than half of total fund assets there], and mostly that’s come out of Asia,” McKinley adds. “That’s a huge swing in a short time, and it’s been a very good thing because Asia’s been hit hardest. We’ve outperformed very strongly this year.”
As for how that capital is being allocated, McKinley takes a conservative approach. “We’re very traditional, fundamental-analysis asset managers,” he says. “We’re as bottom-up as it gets. We try to understand companies better than anyone else on the street. “We look at the aggregate value of all the properties the company owns, their occupancy rates, operating expenses, property taxes, supply/demand constraints, rental gains and losses....
“We also use some more qualitative and quantitative analyses, looking at risks and at company management,” McKinley continues. “If management is good we’ll give extra credit, and if they’re bad, we penalize them because they can destroy shareholder value. We constantly update, to come up with a real-time, current and forward-looking assessment, because we want to be ahead of the market. And we do this with every company we look at. It takes a lot of effort but that’s how we’ve done it for the past 27 years.”
Premium property holdings
The net result is a portfolio that includes the likes of Simon Property Group Inc. (NYSE: SPG), an Indianapolis, IN-based owner/operator of premium global retail real estate, with total market capitalization of US$91 billion. It was named Fortune magazine’s Most Admired Real Estate Company in 2015 (for the sixth time), and had the best-performing global CEOs in 2013 and 2014, according to the Harvard Business Review.
Simon is by far the Renaissance Fund’s single biggest holding at 6.1% of total assets, compared with the benchmark’s 4.6%, but it’s not the biggest overweighting in the fund. “Our biggest overweighting is Klepierre SA (EPA: LI) [at 3.8% versus the benchmark 0.65%, making it the fund’s second-biggest holding]. They’re domiciled in Paris, and they’re the closest peer of Simon in Europe.
“It was a poorly-run second-tier company without a good management strategy, but about three years ago Simon bought a 29% position and went to great pains to reorganize it, imposing Simon’s discipline, culture and philosophy,” McKinley recalls. “They’ve transformed the company – David Simon, the chairman of Simon Property, is now also the chairman of Klepierre – and it’s extremely cheap right now, trading at a discount when it should be trading at a premium. That discount will be arbitraged away.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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