Premier Asset Management's chief investment officer and fund manager Neil Birrell shares why he believes commercial property continues to offer value in his Diversified fund despite a tumultuous year for the sector.
The £52m Premier Diversified fund has returned 19.2% over one year to 12 September, according to FE, versus returns of 10.3% by the IA Mixed Investment 40%-85% Shares sector.
In favour: Commercial property and Europe
Although it may seem self-evident that owning cheap assets, or ones that are priced at attractive valuations, is the
correct stance to take, that is not always the case. Some assets appear cheap for a reason but stay that way, others
simply do not offer any potential for profit and are priced accordingly.
However, there is little doubt that when asset prices are at or near all-time highs, a strong valuation discipline when
investing is important. We are applying that across all asset classes at present.
In the world of commercial property, the prices that are being realised in transactions of the physical assets are not
being reflected in the share prices of many of the companies that own the assets. We see value in these companies.
For example, Hansteen, a holding for both funds sold an industrial site near Bournemouth for a 25% premium to book value.
In equity markets, there is a significant divergence in valuations. More cyclically-orientated companies in many geographic regions are not reflecting the growth prospects in share prices, particularly as GDP growth is providing a tailwind. We are finding opportunities in this area, particularly in Europe, where both these factors are coming together.
Volvo, the manufacturer of trucks, buses and construction equipment (the car business is under Chinese ownership) fits
Overall, in our view, a strong valuation discipline is fundamental to producing good long-term returns, whether they be
capital or income returns, and when markets are at highs and valuations are generally at the high end of norms, it is
Out of favour: Conventional bonds
By the same token, it should seem obvious that owning expensive assets is a bad thing. That, however, is also not always the case.
Bond markets have been on a very strong run that started in 1981 and many commentators have predicted the bubble will burst many times during that time.
Obviously there have been sell-offs, but owning bonds has been a good thing even when they looked expensive. US 10-year Treasury Bonds had a yield of nearly 16% in 1981, this fell to below 1.5% in 2016 and stands at 2% today.
We have very little exposure to conventional bonds. Interest rates look like they are staying low and inflation is not a significant issue, so bond prices may not come under pressure. But we believe their valuations do not provide an attractive risk and reward profile.
Instead, we are looking for decent valuation opportunities in more specialist areas of the market, which includes consumer finance and leasing as well as some high yield and unrated bonds.