Nigel Barnes:

Guy, thank you for joining me. Fantastic to be sitting across the table from you. You’ve been here in South Africa for the week, and we’ve been doing road shows and client meetings. How’s your experience of South Africa been on this trip?

Guy Barnard:

Thanks for having me Nigel. It’s been great to be back in South Africa. I haven’t been here for a few years and it’s the first time for Janus Henderson to come here and build our story. We’ve had a warm welcome and it’s really encouraging to see that South Africans are naturally very familiar with the property sector. I think they see it as part of their asset allocation opportunity set, and I think they’re really interested to hear about what we’re doing as a global team.

Nigel Barnes:

In terms of the Janus Henderson Investors Horizon Global Property Equities Fund that’s registered here in South Africa, which you run, could you give us a quick overview of how you do things and how the fund is structured?

Guy Barnard:

At Janus Henderson we focus on the listed real estate market for our property exposure. I’m part of a global team of nine that invest in REIT (real estate investment trust) markets globally, where we run around $5 billion in total. The fund that’s registered here is the Horizon Global Property Equities Fund which essentially gives us a global opportunity set where we are looking to identify the best real estate opportunities. We work as a global team based in Chicago, London, and Singapore, to try and find those companies that we think are well placed to deliver attractive returns for us and our clients.

We build very concentrated portfolios focused on bottom up stock selection, finding the best opportunities and trying to identify those property sectors that are best placed to outperform in the future. We bring that together, as I said, in a concentrated portfolio of around 55 names. We have a very high active share, so we are really all about investing with conviction. The fund itself is around $2 billion. Geographically, the split is: 65% North America, with the US being the large part of that; 20% Asia Pacific; and 15% in Europe. So, it gives investors true global diversification and enables us as a global team to be looking for those most compelling opportunities at any moment in time.

Nigel Barnes:

In terms of the opportunity set, how has that changed over the last few years? Going back a few years, retail was the driving force in the sector. How have things evolved?

Guy Barnard:

It’s been a core part of our thesis as a team to really frame the real estate sector in the context of the biggest structural changes playing out around us all – and that we’ve all seen accelerate through the pandemic. So, we think the needs and uses of real estate are changing the way that we live and work. The way that we consume goods and services is evolving. I think you’ve, therefore, got to be forward-looking when you think about which parts of the real estate sector are going to thrive in that environment. For us, investing in the REIT sector, I think the great benefit we have is that the REIT sector itself has evolved over time. You talked about retail – that was once 25 or 30% of the global REIT market. It is a fraction of that today. In its place we’ve seen new and emerging sectors generally backed by changing technologies and structural shifts in areas like cell towers, data centers, healthcare real estate, storage real estate and manufactured housing communities become a much larger part of the opportunity that we have and we’re actively exploiting that when we run the fund.

Nigel Barnes:

I suppose the obvious question is, if I’m an advisor listening to this podcast, “Why invest in this particular area as part of the portfolio I’m putting together for my clients who are moving money overseas or who already have assets overseas in hard currency?”.

Guy Barnard:

Frankly, the simple answer would be, “Why wouldn’t you?”. Because if we look back in history, there are a lot of empirical studies by many different institutions and academics over time, and some that we’ve done ourselves, that really highlight that an allocation to property as part of your client’s balanced portfolio is going to improve the risk adjusted returns. If you look at the efficient frontier, you will see adding property and adding REITs to a portfolio of equities and bonds is going to give you a higher return at a given level of risk. That is because real estate is a diversifier. It is less correlated to bonds in the general equity market than some other asset classes. Therefore, you are getting that diversification coming through in your returns over time. You are also doing it from an asset class that gives an attractive income yield, which over time has grown in line with inflation. This is a real asset where rental contracts often benefit from a direct inflation pass through, on an annual basis.

By going globally, when you allocate to REITs rather than perhaps making an allocation purely to your domestic property sector, you’re really enhancing some of those benefits: You’re enhancing the diversification benefit; you’re getting exposure to different currencies (a large part of our fund is US dollar); and it’s an asset class that we think is well positioned today, as we look forward, in an environment where there is more uncertainty and where economies may be slowing, we think the resilience of the income stream from property becomes relatively more attractive in this environment.

Nigel Barnes:

Clearly markets are under pressure at the moment. From a valuation perspective, is there a margin of safety across the sector right now? Should investors and advisors be thinking, bearing a mind in a rising inflationary environment and with rising rates, that this is a place to reconsider?

Guy Barnard:

I think we’ve got to be mindful of the uncertainties out there today. We are seeing a significant shift in the cost of debt capital. So rising bond yields and rising credit spreads will, over time, potentially affect the pricing people will pay for real estate – particularly those that operate with higher levels of leverage. To your point about margin of safety – I think we were operating in environment over the last five years or so where there was an additional risk premium in the pricing of real estate versus long-term government bonds compared to history. So, I think investors were always telling themselves that at some point the central bank Kool-Aid will be taken away to some degree. I think the reality is it’s happened sooner and faster than some people were expecting so there’s been a rapid adjusting in pricing expectations. If we look at the risk premium for real estate today, it’s now back to being more in line with the long-run average having offered this additional premium. So, I think that certainly gives us some comfort. However, we’ve got to be mindful of where interest rates and bond yields go from here.

Investing in the listed real estate sector, which is more forward looking than property valuations which at any moment in time are reflecting history, you get the additional buffer today that shares have adjusted to a new reality. We’re seeing shares coming down as we sit here in early May, so the market is already pricing in a degree of uncertainty and that means that real estate is cheaper today on the stock market than it is to go out and replicate those portfolios and buy them in the direct market. That’s the opportunity that we have investing in the listed sector – you get these areas of mismatch over time and for active investors like us, we can look to exploit that by buying high quality real estate, cheaper in public markets and portrayed in private markets.

Nigel Barnes:

Great, thank you. I think you’ve summed up perfectly the opportunity in global property equities.

It’s been fantastic to be on the road with you this week. I’ve certainly learned a lot about the sector, so thank you for that.

A little birdie told me you snuck out for nine holes on the golf course this week, where did you play and how did it go?

Guy Barnard:

Yeah, we had a little game when we were up in Sun City. I played nine holes with Paul Southgate, who’s in the room with me (my sales guy). I would say I took the edge. It was a closely fought battle but, on a water-surrounded green on the ninth, I managed to come to the fore against Paul. It was a great course in a beautiful setting. I love being here in South Africa, I love the country, so we’ve had a great time – thanks.

Nigel Barnes:

Guy, thank you. It was nice to see you and we’ll catch up with you soon.

Disclaimer

The opinions expressed in this podcast are those of the participants and do not necessarily represent those of Denker Capital. This podcast does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment. Please do not rely on any information without appropriate advice from an independent financial adviser.  The value of investments may go down as well as up, and past performance is not a guide to future performance. Denker Capital is an authorised financial services provider in South Africa (FSP number 47075).