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Actively Managed, Targeted in Global REITs
Janus Henderson Global Real Estate Fund
Interview with: Greg Kuhl

Author: Ticker Magazine
Last Update: May 31, 10:05 AM EDT
Globally listed real estate has many advantages, but it requires an active and selective approach toward equities, properties and markets. Greg Kuhl, portfolio manager of Janus Henderson Global Real Estate Fund, believes in forward-looking analysis, a highly concentrated portfolio of the best ideas, and the flexibility to deviate from the benchmark.

“Our goal is to have the right exposure today so that we can benefit from the shift in the market instead of just following it.”
Q: How did the fund evolve?

A: Janus Henderson was formed by the merger of Janus Capital Group and Henderson Group in May 2017. I came from the Henderson side together with the seven other members of the current real estate team. We had a global real estate product at Henderson since 2001, while Janus also had global real estate products, including the U.S. mutual fund, which was founded in November 2007.

The global real estate team consists of eight full time investment professionals. I am based in Chicago with two colleagues, following North American real estate. There are also three team members in Europe and two in Asia, following these regions. The legacy Janus team consisted of two professionals based in Denver. Although the two teams had a different approach, setup and investable universe, we shared a focus on bottom-up stock picking. The two teams had similar inception dates, track records, and a good amount of overlap in portfolio holdings. After the 2017 merger, the legacy Henderson global real estate team assumed management of the legacy Janus U.S. mutual fund.

Q: How is the fund different from its peers in the REIT space?

A: The main difference from our competitors is our highly concentrated portfolio construction and targeted active share of greater than 75%. We aim for 50 to 60 listed real estate holdings on a global basis, which is different from most of the fund managers in the space, who often own100 names or more.

Being truly active, investing in high-conviction names, and not being beholden to the benchmark, is at the core of what we do. For example, through our bottom-up research on companies’ fundamentals, we have established the view that retail real estate is a challenged industry, at least for the medium term.

In many markets, especially in the U.S., there is an issue of oversupply, which is reflected in our company models. We don’t find any value in many of these companies. As a result, our exposure to global retail real estate is about 12%, compared to the benchmark weight of 25% in retail.

Many of our competitors, and clearly passively managed funds, tend to build sector-neutral portfolios closer to the benchmark weight. That would mean an exposure of 25% to retail real estate, a level of exposure we find inappropriate on a forward-looking basis. Actually, over time we expect retail to become an increasingly smaller portion of the benchmark through continued underperformance.

On the other hand, we have an exposure of about 18% to industrial real estate globally, while the sector represents about 10% of our benchmark. The sector is attractive from a supply/demand perspective and is driven by logistics and supply chain improvement from retailers’ ongoing investment in ecommerce. In the industrial space, we find many undervalued stocks which we expect to benefit from long-term secular growth.

We believe industrial real estate could become the largest sector in the benchmark over time and our portfolio’s meaningful overweight positioning reflects this. Our goal is to have the right exposure today so that we can benefit from the shift in the market instead of just following it.

Q: What are the advantages of REIT investing? How does it differ from investing in other publicly traded stocks?

A:] REITs were created to provide individual investors with access to commercial real estate. That is an asset class with a lot of advantages, including steadily growing income. Compared to other equities, REITs have the advantage of being exempt from corporate income tax as long as they pay a certain portion of their income to shareholders in the form of a dividend.

Over time about two-thirds of REITs total returns have come from reinvested dividends, so it is an important component of the asset class. We also focus on earnings and cash flow growth, because paying dividends requires supportive cash flow, while growing dividends requires growing cash flow.

REITs have many inherent advantages versus other forms of real estate ownership as well. One big advantage is liquidity, because REITs trade daily on stock exchanges around the world. With listed REITs, you can change your allocation, take out capital or invest more at any time. With private funds or direct ownership of real estate, you clearly can’t do that. If you want to monetize a holding in a building, it takes a long time to list it, sell it and go through the legal process.

Another big advantage of listed real estate is transparency. Major stock exchanges require their listed equities to file audited and regulated financial statements. That’s a level of disclosure that investors can’t get with many other real estate vehicles. Another key advantage is the cost, which is attractive compared to the management fees charged by private fund managers.

I would also mention the high level of diversification across property types and geographies which can be efficiently achieved through global REITs from the first dollar of capital invested. Overall, REITs offer a lot of advantages relative to direct real estate ownership as well as tax and diversification benefits not available with general equities.

Q: What core beliefs drive your investment philosophy?

A: First, we believe in being truly active and expressing our views in a meaningful way through portfolio construction. We believe that we need to have a deep understanding of companies and real estate markets to take significant positions. Our first tenet is that we are high-conviction managers and we don’t want our portfolios to look like the benchmark.

Second, we believe that there is opportunity in volatility. About 80% to 90% of our commercial real estate is still privately owned in various forms, meaning that we have a lot of data on the private market value of these assets. That gives us confidence in our valuation estimates, because we can clearly observe where the stocks we follow trade relative to the private market value of the assets they own.

Listed REITs can be subject to the short-term volatility that affects all equities and is not specific to their underlying business. An indiscriminate selloff in the equity market, with no corresponding change in the private market value of the real estate, is a real opportunity for us.

Third, we believe that it pays to be selective. For decades, there were no big changes in the real estate sector across the core property types. Now it is different, because the advent of new technology has changed the way people do things. It is beginning to impact the needs and usage of real estate in significant ways including falling demand for retail space, increasing demand for industrial space, changes in the way office space is being utilized, and the advent of entirely new property types like data centers and cell towers. We try to be forward looking and we believe that it pays to be selective. In the current environment, we need to be really careful about what we invest in, not just to follow the benchmark.

To summarize, our philosophy is based on conviction, being opportunistic and being selective.

Q: How do you define your investable universe?

A: Our universe includes more than just the REITs in the benchmark. We also look at sectors including homebuilders, hospitality management companies like Marriott and Hilton, and data centers to name a few. Our focus is on companies who derive their revenues directly from the control of income producing real estate, not simply just those who have elected REIT tax status. We wouldn’t invest in McDonald’s, for example. Although it owns a fair number of its stores, its business is clearly about more than controlling income-producing real estate. Our overall global universe includes more than 500 stocks. We stick to investing within our expertise, but we will invest up to about 20% of the fund outside of the benchmark.

Q: What is your investment process? How do you narrow down the universe?

A: We make our stock selections at the regional level, North America, Europe, and Asia, because we believe that the people in the region best know the companies and should be the ones who underwrite and evaluate them. We have three teams responsible for their respective global regions – one in Chicago, Illinois, one in London, U.K. and one in Singapore.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc