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Fortius Global Value Outperforms on Amazon, Shopping, Brexit and Trump

02 July 2018

Fortius Global Value Fund was the best-performing global securities fund in Australia in the 12 months to June after it scrutinised fears of Brexit and Trump and bought into real estate securities with exposures to London office and Amazon growth.

Focused on a long-term strategy of identifying value gaps, the fund invested in London office landlord Derwant London, Amazon shed owner Prologis Property Mexico, and Sears department store landlord Seritage Growth Properties, of which billionaire investor Warren Buffett still owns 5.7 per cent. The fund has 9.5 per cent in the financial year to date, outperforming the benchmark by 5.8 per cent and leading its peers listed by the Morningstar.

Fortius Global Value Fund portfolio manager Ragu Sivanesarajah said the hyperventilation from media around some of the bigger macro political events helped identify value opportunities.

When the Brexit referendum vote was announced, Derwant London stock dropped 34 per cent in a day but has retraced nearly all of the loss and delivered a 4 per cent yield on top of that.

Fortius has had a great 12 months for CEO Nicholas Sproats (left) and fund managers Ragu Sivanesarajah and David Curran.Fortius has had a great 12 months for CEO Nicholas Sproats (left) and fund managers Ragu Sivanesarajah and David Curran. Janie Barrett

“When Brexit hit, the stock went down and so did the pound and everyone was saying ‘don’t touch London office’. And we asked: ‘Is the reality of this that there will be a wholesale movement of financial centres to Munich and Paris and that London property will go down 40 per cent? We didn’t think so.”

Then when Donald Trump was elected US president the following November there were similar stories of fear in the market. Prologis Property Mexico, which owns Amazon’s first fulfilment centre in Mexico, saw its stock tumble 14.85 per cent the day after Mr Trump was elected. And even with Mr Trump’s comments about Amazon, the real estate investment trust has surged back 23 per cent.

“Prologis sold off quite a bit under Trump, but we visited some of the assets and we looked at Mexico with its population density. We are not even betting on capital growth because we are getting a yield of 6.5 per cent,” Mr Sivanesarajah said.

The value capture strategy has been a big winner for the fund and one that will not change now that it has had a good year.

Not much love lost: Donald Trump (with Microsoft CEO Satya Nadella in the centre) listens to Amazon boss Jeff Bezos. Trump has criticised Amazon and Mexico but Amazon and Mexico are good investments for Fortius. AP

“We won’t change that strategy,” Fortius chief executive Nicholas Sproats said. “We will stay true. We won’t say ‘well last year value strategy did well so what will we do this year instead.

“We don’t change a lot of stocks. We will hold for about three to five years.”

One stock it has conviction in is Seritage Growth Properties, which was formed to unlock the underlying real estate value of a high-quality retail portfolio acquired from Sears Holdings in July 2015.

Here the arbitrage is on rents – or rent reversion. Since 2010, Sears has gone from more than 3500 physical stores to less than 695 US stores and last month it announced it was closing another 72 stores.

However Sears currently pays a rent of about $4.25 per square foot ($45 per square metre) and as it moves out of the real estate, the new rent achievable for an incoming tenant is around $16 to $18 per square foot ($180 per square metre).

Warren Buffet still likes the value gap in Seritage Growth Properties, which Fortius took a stake in. Warren Buffet still likes the value gap in Seritage Growth Properties, which Fortius took a stake in. Bloomberg

The landlord still has capital expenditure requirements to attract the tenant but there is still good margin.

Fortius has also played Polish shopping centre owner Atrium European Real Estate. The stock has delivered a 10.4 per cent yield. The Fortius team said the real estate trust was selling assets at above book value and giving back the cash. “They are rationalising and focusing on the improving the quality of their existing centres. They don’t have a big pipeline of developments.”

Other retail landlords that Fortius have achieved value with include China’s Hui Xian REIT. The REIT, which owns what is the most premium mall in Beijing with high end Italian brands, has been trading on a big discount to net tangible assets. Again, Fortius has been betting less on the growth and enjoyed the 8.9 per cent dividend yield. There is also a possibility that its substantial owner Hong Kong property tycoon Li Ka-shing could also take the REIT private.

Fortius’ Global Value fund, which went live last year, has used its screening models to obtain an active watch list of about 150 stocks. It has then culled that down to 40 stocks in which it will invest.

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