German funds sluggish in a slow-growth world

German funds are increasingly sluggish against a backdrop of a slow-growth world, according to INREV’s German Vehicles Quarterly Index for 4Q 2017 published this month, which shows an overall slowdown in performance across 193 vehicles.

Fourth quarter performance was a modest 0.98%, down 13 bps from 1.11% in the third quarter, bringing the 2017 12-month rolling return to 4.59% for the year-end. The muted performance was largely driven by a decline in capital growth from 0.58% in the third quarter to minus 0.99% in the fourth quarter. However, there was a substantial rise in income returns up from 0.53% to 1.98% over the same period.

‘The headline from these results may look stark, but there were also some notably strong performances,’ said Henri Vuong, INREV’s director of research and market information. ‘The relative divergence in returns between Spezialfonds and Publikumsfonds is intriguing. But perhaps the most interesting outtake is the better performance of value added versus core – it seems like a positive endorsement for any investors who’ve identified their appetite for greater risk.’

Spezialfonds outperformed Publikumsfonds almost fourfold, ending the year with a quarterly return of 1.92% compared to 0.49%. ‘Publikumsfonds distributed more than Spezialfonds in the fourth quarter, which gave them a lower return than Spezialfonds, which dominate the market,’ Vuong told REFIRE.

Resi beats other sectors by a big margin

Residential was the only sector to see total returns increase from the third to fourth quarters. The sector’s performance rose by 116 bps to 3.08% for the final quarter of 2017, helping residential beat all other sector strategies by a large margin, according to the report.

‘Resi has been doing really well in Germany and the Netherlands, where it’s an established institutional asset class, unlike the UK where it is still nascent,’ Vuong said. ‘Resi has been a hot favourite in recent years.’

Offices came second, recording a return of 1.04% in the fourth quarter, yet down from 1.37% previously. Retail and logistics suffered the largest fall in returns, down from 3.26% in the third quarter to a very modest 0.22% in the last quarter.

Core funds once again slid down, ending the fourth quarter with total returns of 0.98%, versus returns of 2.14% for value added – up from 1.96% in the third quarter.

‘The performance gap has not been so big between core and value-add,’ Vuong said. ‘In Europe, value-add hasn’t delivered that much better than core. Value-add was hit more during the last downturn and has been trying to catch-up since. The definitional lines are being blurred between them. We’re also at a point in the cycle where it is harder to source stock and to deploy capital. It’s also about behavioural economics. Some asset classes, including real estate, have a herding mentality.’

And despite a quarter-on-quarter drop in returns from vehicles targeting Germany (down from 2.63% in 3Q to 2.14% in 4Q), these vehicles still outperformed all other strategies. The next best category was vehicles with a global strategy which posted total forth quarter returns of 1.03%, according to INREV.

‘When you look at returns in Germany, they seem small but they’re actually good for the German market,’ Vuong said. ‘People are a bit cautious as to where we are in the cycle and the German economy, like other developed economies, has been slow to recover after the GFC.’