“I believe in active management,” says Guy Barnard, Co-Head of Global Property Equities at Janus Henderson. “Listed real estate (LRE) is an asset class in which active managers should be able to beat passive strategies.”
This may sound like the mantra of a real estate fund manager’s marketing team, but for Barnard, who has managed two global property equities funds and a European-focused fund for more than a decade, there is far more to this than sceptics might believe.
His strategy has nothing to do with timing the market or other worldly instincts that dictate game-changing investment calls. Instead, he and his team of eight take advantage of the liquidity provided by LRE to access portions of the property world that are responding to structural change faster and with greater focus than direct and passive investors.
Arguably, following months of COVID-19 lockdown across Europe, how investors and industries respond to change has never been more important. “There were a number of major trends, such as home working and e-commerce, that were already underway. The virus has accelerated these to an extent that nobody could realistically have predicted.”
But this is not a problem for the veteran investor. It may change the asset or the sector makeup of his funds, but the strategy remains the same. “As a team, we strive to be forward-looking,” explains Barnard. “We consider how people live, work and spend time today, how that might change in the future and what that means for the long-term attractiveness and demand for different assets.”
A focus on structural changes to the property market has certainly paid off so far. Barnard credits “structural tailwinds” for the outperformance of both of his funds across all significant time horizons.
And it is ready-access to these areas of the market that is the key to Barnard’s outperformance. “Investing only in listed property is an enormous advantage, and I can’t see why it isn’t more widely acknowledged. We can very quickly access niche areas of the market that present great opportunities for income and growth without having to own and operate physical assets. This level of agility is enormously important for us.”
For a study in the importance of agility, investors need look no further than how the sector allocation in Barnard’s funds has changed over the past decade. In particular, the difference between his allocation following the global financial crisis (GFC) and the coronavirus crisis highlights the stark nature of how different crises can create entirely different opportunities.
“Ten years ago, half of my funds were retail real estate,” says Barnard. “This was shortly after the GFC, which was disruptive in terms of creating uncertainty but didn’t actually change how the market was structured. There was a cyclical office market, retail was stable, and a balance of the two smoothed returns over time.”
“COVID-19 has had the same panic effect but is actually a very different crisis. Real estate businesses are, generally, far stronger financially this time; but the virus has forced us to live in a different way, and the aftermath might result in a significant change that asset owners and operators will have to adapt to. Rather than behaving a little differently in the same paradigm, asset owners and operators may have to completely reassess how the sector works for and serves its people.”
Barnard is quick to stress that this is not the end of office and retail. Instead, a transitional period in these sectors could well see quality companies flourish while others fall by the wayside. This presents great opportunities for an active fund manager, as long as the right companies can be found.
Fortunately, this is easier in European listed real estate than in broader equities, for example. “We have the ability to get to know a smaller number of companies in greater detail, and this is a big advantage. Generalist investors get to know a little about lots of companies and then try and make sector or thematic calls. In a world where governments and central banks are behaving unusually, this is hard to do well.”
Instead, Barnard and his team get to know their market well and find, increasingly, that real estate owners are asset operators; the passive approach to managing property is gone. “As a result, we look for people or businesses who have an open dialogue with their current and potential tenants and can react to the changing needs of the client. We look to invest in people who are reacting to structural change in a positive way, which mirrors our own investment outlook.”
For a manager who has found success moulding his portfolios to take advantage of change, the current economic upheaval at the hands of the coronavirus could well spell an even longer period of outperformance for his funds. He just needs to find some owner-operators that are prepared to tack with the changing of the wind.