What is Active Share, and Why is it Important?
In order to outperform the market over the long term, one must manage portfolios which do not look like the benchmark index (i.e., portfolios with high active share). Active share is a measure of the percentage of a portfolio’s holdings that are different than its benchmark holdings. A portfolio that replicates the index has an active share of zero, while a portfolio that owns entirely out-of-benchmark securities has an active share of 100. As an active opportunistic manager, we build a bottom up “50 Best Ideas” portfolio focusing on fundamentals of each and every company, rather than a broad based index approach. Currently JARIX has an active share of 78 vs the benchmark.
Why Active Share is Important and Benefits Investors:
With the current market environment we feel there will be great dispersion of performance between different sub-sectors, geographies and companies within the real estate universe. This will result in “winners” and “losers” within the real estate space over the long term. By doing the underlying research and work on company fundamentals, balance sheets and management teams – this allows for the historical outperformance JARIX has provided investors since inception.
Importantly, there are times in which you see episodic or exogenous factors impact markets where a high active share portfolio can underperform broad based indices over the short term. Since JARIX inception there have been 6 such episodes:
Pre-Brexit:
| As of 6/10/16 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | |
|---|---|---|---|---|---|
| I Share | JARIX | 8.65% | 6.41% | 7.14% | 9.21% |
| FTSE EPRA/NAREIT Index | RUGL | 6.75% | 7.81% | 7.59% | 8.65% |
| Morningstar Global Real Estate Category | GRE | 4.49% | 2.83% | 5.16% | 6.51% |
Periods of market stress (e.g. Brexit). “Junk rallies” – Declining bond yield termporarily drive “bond fugitives” to “rent” lower-quality (igher-yielding) REITs:
| As of 9/30/16 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | |
|---|---|---|---|---|---|
| I Share | JARIX | 7.34% | 10.63% | 6.63% | 13.14% |
| FTSE EPRA/NAREIT Index | RUGL | 8.16% | 11.66% | 6.23% | 11.47% |
| Morningstar Global Real Estate Category | GRE | 8.22% | -1.03% | 0.40% | 1.67% |
Over the long-term, these transitory effects unwind:
| As of 12/31/16 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | |
|---|---|---|---|---|---|
| I Share | JARIX | 7.59% | 7.59% | 6.61% | 10.91% |
| FTSE EPRA/NAREIT Index | RUGL | 4.99% | 4.99% | 6.78% | 10.32% |
| Morningstar Global Real Estate Category | GRE | 1.97% | 1.97% | 4.20% | 8.72% |
For comparison, below are the recent performance numbers as of the end of 2022, the end of January 2023 and 3/31/2023. It looks very similar to the middle of other periods of underperformance based on exogenous, non-fundamental factors where there is underperformance in the short term but the fund maintains strong long-term performance. We expect that JARIX’s performance will recover (and then some) when the market returns its attention back to industry and company fundamentals.
| As of 12/31/22 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
|---|---|---|---|---|---|---|
| I Share | JARIX | -24.18% | -24.18% | -2.14% | 2.48% | 5.19% |
| FTSE EPRA/NAREIT Index | RUGL | -24.41% | -24.41% | -4.06% | 0.69% | 3.90% |
| Morningstar Global Real Estate Category | GRE | -25.62% | -25.62% | -4.86% | -0.23% | 2.67% |
| As of 1/31/23 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
|---|---|---|---|---|---|---|
| I Share | JARIX | 10.80% | -12.18% | 0.91% | 4.22% | 5.84% |
| FTSE EPRA/NAREIT Index | RUGL | 9.02% | -12.59% | -1.55% | 2.44% | 4.47% |
| Morningstar Global Real Estate Category | GRE | 8.81% | -14.28% | -2.28% | 1.18% | 3.26% |
| As of 3/31/23 | YTD | 1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | ||||
|---|---|---|---|---|---|---|---|---|---|
| I Share | JARIX | -0.21% | -21.88% | 8.51% | 3.13% | 4.59% | |||
| FTSE EPRA/NAREIT Index | RUGL | 1.04% | -20.63% | 7.58% | 1.79% | 3.37% | |||
| Morningstar Global Real Estate Category | GRE | 1.10% | -20.79% | 5.71% | 0.55% | 2.31% | |||
| JARIX % Rank in GRE Category | -- | 78 | 11 | 26 | 11 | ||||
| # of Investments in Category | -- | 194 | 186 | 181 | 110 |
Why Now?
With the current market dislocation that we see in publicly traded real estate, being opportunistic and selective will be prudent for investors over the long term. Over the last decade plus we have seen both stock and bond markets buoyed by zero interest rate policies implemented by global central banks resulting in strong bull markets in both equities and fixed income. With the recent reversal of these policies we feel investors who were able to capture and create alpha and outperformance by simply having beta to the market will now face challenges with that approach as a new regime from global central banks unfolds and average returns will likely become lower, and dispersion of results becoming higher. In this new environment we feel active management and high-conviction fundamental investing will be a main driver of outperformance and alpha for investors.
Currently we see public real estate trading at a significant discount to their private real estate counterparts, historically that has been an opportunistic time for long term investors to be allocating to the public real estate space within industry’s and companies with strong operational expertise, durable balance sheets and cashflows, and experienced management teams. By investing in a high active share portfolio like our Global Real Estate Fund(JARIX) with a strong track record of fundamental stock picking since inception, we offer an investment solution designed to take advantage of these market dislocations that can help deliver alpha and strong risk-adjusted returns for clients to help the meet their ultimate needs and goals. Volatility and risks are expected when investing, this recent volatility and price dislocation can be an opportunity for investors if they let it be. Having a steady team at the helm and tested strategy like JARIX offers, investors can turn these challenging markets into opportunities moving forward.
Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. For performance information current to the most recent month-end, please call 888.814.8180.
Source: Morningstar Direct. Performance data quoted above is historical.
Morningstar Category/Morningstar Category % Rank Investments are placed into Morningstar categories based on their compositions and portfolio statistics so that investors can make meaningful comparisons. Morningstar Category % Rank is a fund’s total-return percentile rank relative to all funds in the same category. The highest (or most favorable) percentile rank is one and the lowest (or least favorable) percentile rank is 100. The Category % Rank complements the Morningstar Rating, especially for funds in smaller categories because these funds may have received a 3-star rating but could be in the top half of their category performance.
The Fund’s management has contractually waived a portion of its management fees until December 31, 2023 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.11%, 1.36%, 2.11% and 1.11% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.04%, 1.36%, 2.11% and 0.94% respectively. 5.75% is the maximum sales charge on purchases of A Shares.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least December 31, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.04%, 1.69%, 2.37% and 0.94%, respectively, subject to possible recoupment from the Fund in future years.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information about the Fund is contained in the prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing.
The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and Ranger Global Real Estate Advisors, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.