Investment Approach

Investor Information - The Investment Process

The Investment process

The Reitway Global Property funds are managed on a benchmark agnostic basis which is expressed by taking positions beyond the components of conventional indices. This unconstrained approach expands our opportunity set in order to include many REITs which are often overlooked by mainstream analysts or are not included in traditional global property indexes.

Our investment philosophy and process differs from a benchmark centric approach where the benchmark has a significant influence on security selection and portfolio construction. In practice, our portfolio exhibits an active share in excess of 90% due to positions and position sizes that differ substantially from Global REIT indices. This philosophy is supported by the research paper How active is your manager, which found that an active share of 80% to 100% is essential in generating excess returns.

Our investment style is Growth At a Reasonable Price (GARP). We invest in REITs with superior long term growth prospects, allocating capital when valuations are attractive.

Our direct REIT holdings are required to satisfy the following target investment thesis:
• Display strong fundamentals;
• These robust fundamentals must position these REITs to achieve market beating cash flow growth; and
• These REITS must trade at reasonable valuation levels in terms of the timing of the allocation of capital to these holdings.

Our investment process focuses on selecting the most promising investment opportunities in the Global Real Estate universe. Stock selection is combined with sound portfolio management techniques in order to construct a portfolio with the highest probability of delivering superior performance for investors.

Our investment process consists of four steps that are critical to the management of our portfolios:

Initial Screening & Research

At Reitway, in addition to our own screening methods, we generate investment opportunities through the services of specialist Real Estate analysts in the various global geographies. These analysts effectively act as agents for Reitway and it’s their task to provide our investment team with the best fundamental opportunities in their coverage universe.

The quality of research received from our research partners are continuously evaluated according to the following criteria:

Track-record: Analysts must have a proven track-record of spotting excellent investment opportunities.

Objectivity: Analysts must show the ability in any context to judge fairly, without bias or external influence.

Clearly-defined assumptions: Analysts should clarify the assumptions used in analysis, forecasts and valuation models.

Consistency: Analyst assumptions should remain consistent in method and application. Fact vs. opinions: Analysts should make a clear distinction between facts and opinions.

Disclosure: All potential conflicts of interest faced by the analyst or his firm must be disclosed.

Internal Research

Secondary research is conducted by the Reitway investment team to formulate a deeper understanding of the investment case for a specific security. Secondary research include:

  • Analyst and management conference calls
  • Critical assessment of valuation models
  • Supplementary financial and industry analysis
  • Property tours and conferences
  • Quantitative relative valuation models

The outcome of our internal research is a detailed investment case, which is presented and discussed at our weekly portfolio meetings.

Buy & Watch Lists

The Buy List consists of REIT investment ideas that will be included in the master portfolio as part of the direct REIT strategy. The Watch List consists of possible candidates for inclusion in the portfolio upon further research and/or monitoring.

Investment Strategy

An actively managed, focused and high-conviction strategy that seeks attractive current income and long-term capital growth by investing in a diversified portfolio of real estate securities. The master portfolio is constructed using two complementary investment vehicles:

  • Direct real estate securities as included in our Buy list (typically 20-30 positions).
  • A portfolio of real estate Closed-End Funds that enhances the yield, diversification and risk- adjusted returns of our total portfolio.

 

Portfolio Overlays
  1. Tactical Asset Allocation
    Broad-based capital market expectations are formulated in order to determine the relative attractiveness of the various global REIT markets. This supplements our bottom-up stock selection process.

  2. Currency Management Movement in the value of currencies can have a profound impact on a global investor’s returns, hence managing currency risk is an important part of portfolio construction.

    Reitway manages currency risk by constructing a currency-adjusted portfolio that takes into account expected currency movements relative to our reporting currency, the US dollar. Here our primary focus is to avoid currencies that have the potential to fall significantly and erode local currency returns.

    Various reputable sources are used in order to assist in our assessment of currency risk. For example, Bank Credit Analyst (BCA) research combines propriety models and macroeconomic themes in order to determine the underlying forces that impact currency trends globally. These expert external views supplement our own internal analysis in order to finalise currency views.

  3. Interest Rate Sensitivity
    Reitway classifies REITs as either Equity-like or Bond-like, based on their sensitivity to interest rate changes. This is a yet another marginal factor that we consider in portfolio construction based on current interest rates, but more importantly depending on the outlook for interest rates (largely determined by external expert macroeconomic research sources), both globally and for specific regions.

  4. Risk Management
    Risk management plays an important part in our investment process and is managed through adequate diversification and by minimizing REIT specific risks.

    In addition to the fundamental risks that are evaluated as part of our research process, we assign risk-reward ratings (based on the Sortino-ratio) to each security in our portfolio. These ratings act as a base for determining security sizes in the portfolio.

    The following constraints are applied to the weightings of a security in the master portfolio:

    • % of securities with weights greater than 5% may not exceed 40% of the total portfolio
    • Minimum market cap of $500mn for all securities with a weight greater than 5%
    • Maximum holding of 10% per REIT.

    In the execution step, Reitway implements portfolio decisions made during the preceding stage.

    Trading
    Technical indicators and financial news releases assist in terms of trading of securities.

    We constantly monitor the market on trading days and we adjust our limit prices throughout the trading session in order to negate execution uncertainty concerns. Market orders may be used from time to time if this order type is warranted by liquidity constraints or low market volumes.

    Sell discipline
    The two main strategies that we employ is the Fundamental Deterioration and Opportunity Cost sell based disciplines.

    Fundamental Deterioration
    Sell on the deterioration or reversal of the investment thesis.

    Opportunity Cost
    The opportunity cost of holding or staying invested in a current position can be gauged through the evaluation of alternative opportunities that potentially offer superior risk-adjusted returns. If the team views an alternative holding as superior, the current security is sold (or the allocation is decreased) in order to include the new investment. This sell discipline ensures that the portfolio includes only those REITs with the most attractive risk-return prospects

     

    Performance Evaluation

    Performance evaluation is part of the feedback step of the investment management process and acts as a control mechanism. It identifies our investment program’s strengths and weaknesses and attributes the fund’s investment results to various key decisions.

    We try to address the following questions during the examination of our investment performance;

    1. What was the portfolio performance?
    2. Why did the portfolio produce the observed performance?
    3. Is the performance due to luck or skill?

    These questions constitute the three primary issues of performance evaluation. The first issue is addressed by performance measurement, which calculates the rates of return based on investment- related changes in the portfolio’s value over specified time periods.

    Performance attribution deals with the second issue. It extends the results of performance measurement to investigate both the sources of the portfolio’s performance relative to our benchmark and the importance of those sources.

    Finally, performance appraisal tackles the third question. It attempts to draw conclusions concerning the quality (that is, the magnitude and consistency) of the portfolios relative performance. Evaluation meetings are held on a monthly basis.

    Feedback
    Minimum Disclosure Documents and Detailed Information Sheets are provided to clients on a monthly basis.

    We also publish the Reitway Review, which offers commentary on our investment views and portfolio positioning on a quarterly basis.