**Real Estate Investment Trust (REIT) Market Review and Outlook**
The second quarter of 2024 saw a continued strong rally in the equity markets, with the S&P 500 Index up 24.54% over the trailing 1-year period. The consumer sector remained steady, and labor markets maintained a fine balance between growth and wage pressures. As a result, the market grew optimistic about inflation coming under control, leading to expectations of rate cuts in Q3 2024.
In this environment, Real Estate Investment Trusts (REITs) underperformed the broader market, with the FTSE NAREIT Equity REITs Index up only 0.06% during the quarter. The 10-year U.S. Treasury yield increased 20 basis points, while Baa yields rose 18bps, yielding 5.68% at the end of June.
REIT sub-sectors diverged in performance, with defensive sectors such as Healthcare, Residentials, and Storage outperforming, while Timber, Hotels, and Industrials underperformed. For 2024 YTD, REITs were slightly down -0.14% versus the S&P 500, which was up 15.29%. Industrial REITs were the second-worst performing sector, down -12.83%, as warehouse demand cooled off due to slow growth in retail sales and inventory.
**Fund Performance**
The Fund returned -1.10% compared to a return of +0.06% for the FTSE NAREIT Equity REITs Index. Two of the Fund’s three potential alpha sources (long-only portfolio, long/short portfolio, and risk allocation model) contributed negatively to performance during the quarter. The long sleeve underperformed the FNRE Index by -63bps, while the long/short sleeve detracted -20bps from the Fund’s return.
**Sector Allocation and Stock Selection**
The Fund maintained an average long-only sleeve allocation of 90.0% and a long/short sleeve allocation of 40.0%. Sector allocation was slightly positive overall, driven principally by defensive positioning. Positive contributions came from Industrials (+15bps) and Hotels (+6bps), while negative contributions came from Diversified (-12bps) and Data Center (-6bps). Stock selection was negative, with underweight positions in AIRC (+20.35%) and REXR (-10.52%) contributing to underperformance.
**Outlook**
Despite a choppy macro backdrop, we remain constructive on REITs due to solid fundamentals in many sectors and recent underperformance. At quarter start, the Fund was allocated 90% to the long-only sleeve, above the long-term average of 89%. As a reminder, the Fund was designed to operate with a maximum beta to the REIT index of up to 1.10 (110% long-only allocation), providing dry powder should our outlook turn more optimistic.
Looking forward, the Fund will continue to strive to outperform its benchmark, participating in REIT performance while seeking to reduce daily volatility and major drawdowns. We believe REITs are well-positioned as the interest rate environment turns into a tailwind and given relatively attractive valuations.
**Risk Considerations**
Investments in securities involve market risks that may cause prices to fluctuate over time. There is no assurance that any fund will achieve its objective and/or strategy. The Fund’s investments in real estate securities subject it to the same risks as direct investments in real estate, which is particularly sensitive to economic downturns. Additionally, the Fund’s use of derivatives, short selling, and leverage may expose it to additional risks. Please read the prospectus for more detailed information regarding these and other risks.
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