Displaying items by tag: ratings

2024 has been underwhelming so far for REITs, as evidenced by the iShares US Real Estate ETF’s YTD 4.5% decline, while the S&P 500 is up 9% YTD. Two major reasons for this underperformance are continued struggles for the office segment and less clarity about the outlook for monetary policy, following a series of stronger than expected labor market and inflation data.

However, the intermediate-term outlook for the sector remains favorable due to attractive yields and earnings growth despite a challenging, near-term environment. Further, most segments are in good shape. According to Steve Brown, the senior portfolio manager at American Century Investments, “The REIT industry is very diversified among different sectors like data centers, towers, and industrial, and office is only about 4 or 5 percent of the index. So while office has issues, many other property sectors have pricing power and can raise rents greater than inflation.” 

He also favors public REITs over private REITs, as public REITs are cheaper while offering more liquidity. He notes that many private REITs are still trading at or just above net asset value (NAV), while public REITs are trading at an average 20% discount to NAV. Overall, he sees a much more benign environment in 2024, especially once the Fed starts cutting rates.  

Finsum: REITs have had a rocky start to the year. However, the fundamentals for the sector continue to improve, while many of its challenges are already reflected in depressed valuations.

Some of the biggest names in finance are benefitting from a lack of reliable ESG data in emerging markets. Federated Hermes is one firm that has spent considerable time over the past year building its ESG exposure to emerging markets. The company says “artificially low” environmental, social and governance ratings have created opportunities for investors. Martin Todd, a portfolio manager at Federated Hermes told Bloomberg that “the mainstream ESG ratings firms often give emerging-market stocks a lower ranking because of fewer disclosures relative to companies listed in the developed markets. That’s created some really interesting valuation opportunities.” In emerging markets, ESG regulations are less advanced than in developed markets and ratings aren’t as established. In fact, ESG ratings for emerging market companies are artificially low due to a lack of disclosure, not because of any particular concern. While that creates an extra layer of risk for some investors, for firms with deep pockets, it provides an opportunity to beat the market.

Finsum:Fund managers are generating alpha in emerging market ESG stocks due to a lack of disclosure and artificially low ratings.

According to a global two-phase survey from Morningstar Indexes and Sustainalytics, asset owners are not, by and large, implementing ESG factors in their portfolios. The Voice of the Asset Owner survey asked 500 global asset owners in 11 countries their thoughts on ESG. Survey findings revealed that only 29% of asset owners reported that they consider ESG factors for at least half their holdings. The reason for the low figure was attributed to concern over the impact on returns, a lack of available products, and the reluctance of both clients and stakeholders. However, the survey also showed that 85% of asset owners believe ESG factors are material to investment policy, while 70% said that ESG factors have become more material over the past five years. Asset owners that participated in the survey included OCIOs, family offices and sovereign wealth funds, pension funds, and insurance providers. Two-thirds of the respondents noted that the quality of ESG data, indexes, ratings, and tools have improved. However, about half stated that data and ratings would stand to benefit from improvements in accuracy, timeliness, and greater objectivity.

Finsum: A recent survey revealed that while many asset owners believe ESG factors are material to investment policy, only 29% consider ESG factors for at least half their holdings.

(New York)

You may not be paying much attention to it, but the last month has been very good for investment grade bonds. The reason why is that ratings agencies are in the midst of a massive wave of upgrades to companies that got downgraded at the start of COVID. This has sent demand for debt soaring as companies re-enter the investment grade market. For example, just in the week ending July 16th alone, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) pulled in $1.1bn in inflows. According to a credit strategist at Citi, “It’s like something that I have not seen in my time [in the industry] … After the financial crisis we didn’t get major companies moving back to investment grade so quickly”.

FINSUM: This is the early innings of yet another corporate bond bull run. Only credit specialists have mostly paid attention to this point, but investment grade bonds seem a good choice given the credit rating tailwind.

(New York)

It is pretty easy to sum up what seems like it will be a forthcoming bull market in high yield bonds: “2021 will be the year of the upgrade”. That quote comes from Matt Brill, head of North America investment-grade at Invesco. Ratings agencies are reportedly on the cusp of upgrading between $100 bn and $300 bn of junk bonds to investment grade this year and next. Fund managers are trying to buy the bonds they think will be upgraded as such a move will cause a lot of arbitrary buying by index trackers.

FINSUM: There were huge downgrades last year as the pandemic wiped out prices in big parts of the sector. Now, with the economy resurgent, big upgrades look likely, which should give the whole asset class wings.