A yardstick is essential for measuring any performance, and to gauge whether it is good or bad. For instance, an athlete aspiring to compete in the Olympics has to clear the qualifiers, prior to the final event. In the final event, the performances of that day become the benchmark. Even with reference to that benchmark, rating the performance as good or otherwise is a matter of perspective.
A yardstick is essential for measuring any performance, and to gauge whether it is good or bad. For instance, an athlete aspiring to compete in the Olympics has to clear the qualifiers, prior to the final event. In the final event, the performances of that day become the benchmark. Even with reference to that benchmark, rating the performance as good or otherwise is a matter of perspective.
The same goes for investment products. Investors want to know how their fund manager has performed. This cannot be done in isolation, hence a benchmark is required. Usually, it is a standard benchmark, provided by the exchange such as NSE or BSE or a neutral agency like a credit rating agency.
The same goes for investment products. Investors want to know how their fund manager has performed. This cannot be done in isolation, hence a benchmark is required. Usually, it is a standard benchmark, provided by the exchange such as NSE or BSE or a neutral agency like a credit rating agency.
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Where a popular benchmark is not available, a customized one is run as a mandate by the product manufacturer to the index provider. For Target Maturity Funds, which are debt funds with a defined maturity date, a customized benchmark is prepared, as there is no readily available benchmark answering that description.
As per the Securities and Exchange Board of India (Sebi) regulation, a mutual fund (MF) scheme has to set a primary benchmark for its performance, and an additional benchmark which is more bespoke. Sebi does not dictate what the benchmark should be; the asset management company (AMC) decides that. Though there is no guideline as such from Sebi, the AMC chooses the benchmark that fits the given description of a fund.
In reality, tailor-made benchmarks are not available for the many funds on offer. For example, for a large cap fund, the benchmark may be Nifty 100 Index or BSE 100 Index. For a small cap fund, it could be Nifty 100 Smallcap Index or Nifty 250 Smallcap Index or BSE Smallcap Index or BSE 250 Smallcap Index, as decided by the AMC. For an international (US) fund, it may be say S&P 500. For a debt fund, it would be the relevant Crisil or Nifty index.
The usage of benchmark is for performance comparison. Over the last few years, active funds have underperformed their benchmark, giving rise to an ‘active’ debate. There are certain practical limitations in running an active fund as against the benchmark it is being compared with.
For one, there are sectoral and issuer level investment limits for MF schemes. The limit for a MF scheme per issuer is 10%. When one dominant stock runs up and the weightage is more than 10% in the index, it becomes a drag for a fund being compared with the index. It is not only about the cap of 10%, but the fund manager may take a conscious decision to not exceed an internally decided limit for exposure. Sometime earlier, a large cap stock was rallying in the market but most actively-managed-fund managers decided to avoid that stock. This was due to certain corporate governance question marks and risk perception. Indices, however, are run on a pre-decided algorithm, including that stock which was rallying. Many a times, the AMC runs a cash component in a fund to meet redemption pressure. This becomes a drag when the market is rallying as the returns from the cash component is lower than stocks at that point of time. In a MF scheme, there are recurring expenses, known as TER, or total expense ratio.
An index tracks the price movement of the underlying instruments and the payouts, usually in the form of dividends. There is no ‘expense’ to be incurred by the index. That apart, there are transaction costs in MFs, for purchase and sale of instruments. There may be liquidity or impact cost of transactions whereas an index has to just track the market price movements. In a regular plan, there is the additional component of distribution remuneration.
It is operationally not easy for investors to replicate the index by themselves. They will need to purchase stocks in the same proportion as in the index. It has to be tracked for changes, for rebalancing. Net-net, there is a price for everything. To give an analogy, for my travel, I can either hail a cab on my own or use a ride-hailing app. The app provider would charge extra because it has to exist commercially and I would pay the charge if I see value in its proposition.
Joydeep Sen is a corporate trainer and author.
Sydney’s trophy market ranks third among the top 10 global cities with the strongest growth in prime real estate rental prices, with a significant 6.7 per cent increase over the past 12 months to the first quarter of 2023, according to Knight Frank’s Prime Global Rental Index.
In addition to the city’s impressive annual growth figures propelling the NSW capital from 6th place in the previous quarter, the strong growth also helped Sydney’s prime market outpace annual rental price growth observed in the luxury residential markets across Toronto (10.3 per cent), New York (10.3 per cent), and Monaco (8.1 per cent).
Other upper-end city markets that rounded out the top 10 list were Tokyo (4.8 per cent), Geneva (3.4 per cent), Auckland (-0.8 per cent) and Hong Kong (-3.6 per cent).
Singapore and London were the only trophy markets to beat out the Australian city, notching annual rental gains of 31.5 per cent and 16.9 per cent, respectively.
During the first quarter of 2023, Sydney experienced the second-highest growth in prime residential rents, with a notable increase of 5.3 per cent. This growth was surpassed only by Singapore, where luxury property rental prices rose by 6.4 per cent over the same three-month period.
Overall, rents in the 10 prime cities tracked by the index increased 8.5 per cent in the 12 months to March 2023, with rents in eight out of 10 markets hitting new records.
On a global scale, prime rents are now 14 per cent above the pre-pandemic high reached during the third quarter of 2019 and 21.7 per cent above the pandemic low reached during the first quarter of 2021.
In Sydney, prime rents are 15 per cent higher than their pre-pandemic high in the fourth quarter of 2018 and 21 per cent up from the pandemic low recorded in the second quarter of 2021.
Knight Frank head of residential research Michelle Ciesielski said rents in global luxury residential markets were continuing to see strong growth.
“While the rate of annual growth over the first quarter of this year slipped back from the 10.2 per cent recorded in the previous quarter, globally rents are still rising at a rapid clip,” she said.
She stated that this upward trend, observed since 2021, is a result of cities recovering from the pandemic, accompanied by a surge in global and domestic prime rental demand as workers relocate back to urban areas with the reopening of economies.
“Sydney’s prime residential rent growth is a somewhat consistent trend alongside the mainstream rental market, which recorded 15.3 per cent annual growth and 3.2 per cent in the first quarter of this year,” she added.
Knight Frank head of residential Erin van Tuil said the growth in rents across all residential property in Sydney was being driven by a combination of strong demand and a chronic undersupply.
“We are seeing this imbalance between demand and supply in both [the] affordable and luxury residential market, with very low vacancy rates, hence why Sydney prime residential rents have experienced strong growth over the past 12 months,” she said.
The expert highlighted one of the major factors driving strong growth in prime rents in the NSW capital is returning expats needing accommodations, as well as a rise in corporate rentals for new talent hires from outside Sydney.
Another factor tightening the rental dynamics in the city, according to Ms van Tuil, was the challenges faced by the construction industry.
“Construction delays due to labour and materials shortages are also contributing, as tenants are forced to rent for longer while their new builds or renovations are being completed,” she stated.
Interestingly, she also noted a rise in film production crews looking to secure prime rental properties for extended periods, with short-stay nightly hotel rates having become increasingly more expensive and accommodation is harder to find as business travel ramps up.
“With housing construction volumes remaining low amid issues faced by the construction sector and fewer developers building product suitable for investors due to a focus on owner-occupiers, rents in Sydney’s prime residential market are expected to continue to rise well above trend through 2023,” she forecast.
Downtown office vacancy rates across Canada jumped to 17.7 per cent at the end of last year, from 10.2 per cent before the pandemic, according to Capital Economics.Graeme Roy/The Canadian Press
The commercial real estate market, especially in the office building sector, is about to enter a perfect storm of declining occupancy rates, lower rents, high interest rates and less access to credit. This in turn will challenge banks and other financial firms that lend to the industry as well as pension funds that have significant exposure.
There is a narrative that the U.S. Federal Reserve will keep raising interest rates until they “break something.” Well, with their rate hikes, the Fed has put at risk not just breaking the commercial real estate industry – but shattering it.
Over the next five years, more than US$2.5-trillion in commercial real estate debt will mature, according to The Kobeissi Letter, which tracks and comments on global capital markets. Some US$1-trillion of that debt is believed to be in need of rolling over in the next two years.
Much of this debt was financed when interest rates were almost zero. Now, it needs to be refinanced at much higher rates and in a market with less liquidity.
If rising interest rates and a huge impending rollover of debt were not foreboding enough, the industry is facing radical societal changes of a magnitude not seen since the development of the modern skyscraper.
The Toronto market provides an illustration.
Skyscraper after skyscraper rose over the past several decades, changing the city’s skyline. There had always been a willingness for banks, corporations, law and consulting firms to pay a hefty premium to be located in the financial district.
These days, the advent of new technology has lessened the need for a highly concentrated financial district. In the meantime, workers have enjoyed sticking to their home offices.
These are global trends, and the declining rates of commercial real estate occupancy can be seen across Canada. Downtown office vacancy rates across the country jumped to 17.7 per cent at the end of last year, from 10.2 per cent before the pandemic, according to Capital Economics.
Commercial real estate is a deceptively simple business. There are a few parameters that make the difference between success and failure.
First, occupancy levels. The higher percentage of space one can rent the higher the revenue. Second, how much rent being charged. This is subject to supply and demand.
Next, since most commercial real estate is financed largely by debt, the level of interest rates is critically important, too. Like financial institutions, commercial real estate companies must be conscious of the maturity profiles or their assets and liabilities. The second to last thing a commercial real estate company wants is to be caught in long-term leases while their debt has a short average maturity while rates skyrocket. The last thing they want is to have tenants leave and rents fall while rates soar.
Unfortunately, nearly everything seems to be going wrong right now.
All this suggests the industry is entering a cyclical bear market. Vacancy rates are rising and will continue to rise as the economy weakens, putting downward pressure on rents and top-line revenue. As debt matures, interest costs will explode. Companies that became addicted to cheap interest rates will have to adjust.
Lenders such as banks and pension funds will see their collateral values decline as the value of buildings plummet. Loan-to-value ratios will drop, making lenders unwilling or even unable to refinance borrowers. This will put further pressure on the financial system.
Commercial real estate booms and busts aren’t anything new.
Between the fourth quarter of 2009 and the last quarter of 2022, the Fed’s commercial real estate index, which reflects the value of buildings, rose by 128 per cent, or about 6.5 per cent annually. During the financial crisis, the index dropped almost 40 per cent from the third quarter of 2007 to the 2009 bottom. In the previous bear market from the end of 1989 to the end of 1993, the index fell by 26 per cent.
But now, the adoption of remote working will make for a particularly challenging period ahead. The days where anyone with enough capital could thrive in commercial real estate are over.
Investors would be wise to underweight commercial real estate investment trusts in their portfolios, or at least be conscious of debt levels and leases coming due relative to loan maturities in the near future. Office REITs are trading at an almost 40-per-cent discount to net asset value, so the market is already signalling problems ahead. Those looking for buying opportunities should seek out names with low levels of leverage.
Be mindful, too, of how much exposure banks in one’s portfolio has to commercial real estate.
We are in for a bumpy ride.
Tom Czitron is a former portfolio manager with more than four decades of investment experience, particularly in fixed-income and asset-mix strategy. He is a former lead manager of Royal Bank’s main bond fund.
(Alliance News) – Stock prices in London were higher on Wednesday at midday, as investors hope for slower interest rate hikes by the world’s key central banks.
The FTSE 100 index was up 14.32 points, 0.2%, at 7,786.02. The FTSE 250 was up 160.60 points, 0.8%, at 20,014.05, and the AIM All-Share was up 5.85 points, 0.7%, at 873.67.
The Cboe UK 100 was up 0.1% at 778.45, the Cboe UK 250 was up 0.9% at 17,474.90, whilst the Cboe Small Companies was down 0.1% at 14,070.56.
Investors are hoping for a dialling back of the pace of interest rate rises, with markets now expecting a 25 basis point hike in US interest rates. Should the Fed raise rates as expected on Wednesday, this would take the federal funds rate range to 4.70% to 4.75%.
The Federal Open Market Committee will conclude its two-day policy meeting on Wednesday and announce its decision at 1900 GMT. This will be followed by a press conference with Fed Chair Jerome Powell at 1930 GMT.
“The FTSE 100 moved higher on Wednesday morning, with today’s trading session in London sandwiched by strong gains on Wall Street overnight and the US Federal Reserve’s decision on interest rates later,” says AJ Bell investment director Russ Mould.
“A lot is riding on the Fed dialling back the pace of rate hikes to 25 basis points and there will also be plenty of attention on the surrounding messaging from Chair Jerome Powell and his colleagues. Helping the market’s mood on Tuesday was data that revealed slowing US wage growth, another signal that inflationary pressures have peaked.
“Investors clearly hope we are getting closer to the point at which the Fed pivots away from rate rises and that it does so before too much economic pain has been inflicted.”
In the US on Tuesday, Wall Street ended higher, with the Dow Jones Industrial Average ending up 1.1%, the S&P 500 up 1.5% and the Nasdaq Composite up 1.7%.
New York stocks are called higher ahead of the Fed’s decision, which is made during US market hours. The Dow Jones Industrial Average was called up 1.1%, the S&P 500 index up 1.5%, and the Nasdaq Composite up 1.7%.
On Tuesday, figures from the Bureau of Labor Statistics on Tuesday showed that US wages and salaries increased in the final quarter of 2022.
According to the US Bureau of Labor Statistics, wages and salaries increased 1.0% in the three-month period ended December compared to September 2022. Wages and salaries increased 5.1% for the 12-month period ended December 31.
The European Central Bank and the Bank of England also hold their rate-setting meetings this week, with decisions due on Thursday. Both are expected to hike by 50 basis points.
In European equities on Wednesday, the CAC 40 in Paris and the DAX 40 in Frankfurt were both down 0.1%.
There was some good news for the eurozone, and the ECB, on Wednesday as a flash estimate from Eurostat showed that consumer price inflation slowed in January.
In January, the eurozone annual inflation is estimated at 8.5% last month, down from 9.2% in December. A year earlier, the inflation rate for January was 5.1%.
On a monthly basis, consumer prices in the eurozone fell by 0.4% in January.
The figures, however, do not include German inputs as they have been postponed.
“All in all, the data looks decent as a jump in core inflation has been avoided but uncertainty remains without final German figures. For the ECB, the muddied picture of inflation is annoying, but dont expect it to throw it off course for tomorrow. The jump in core inflation in some key countries will be enough for the central bank to confirm its current hawkish stance and add another 50 basis points to policy rates,” remarked ING Senior Economist Bert Colijn.
Eurostat also said the eurozone unemployment rate for December was 6.6%. This is stable compared with November 2022 and down from 7.0% in December 2021.
Meanwhile, the downturn in the eurozone’s manufacturing sector eased somewhat in January, according to survey results, as cost pressures faded.
The S&P Global eurozone manufacturing purchasing managers’ index rose to a five-month high of 48.8 in January from 47.8 in December.
At below the 50.0 no change mark, the reading shows the sector is still in contraction, though the pace has eased slightly.
The situation is “considerably brighter” than a few months ago, according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
“Not only has the rate of output decline moderated now for three consecutive months, but business optimism about the year ahead has also surged higher over the past three months,” he said.
In the UK, the PMI from S&P Global showed the manufacturing sector continued to contract in January but input inflation eased.
The seasonally adjusted S&P Global-CIPS manufacturing PMI edged up to 47.0 points in January from December’s 31-month low of 45.3 and above the flash estimate of 46.7.
This marks the sixth consecutive month of contraction in UK manufacturing.
S&P noted that average input costs eased to a two-month low in January, however there was a slight uptick in selling price inflation.
Looking ahead, S&P said that manufacturers’ confidence is reviving from recent lows, hitting a nine-month high. However, it noted that the mood continues to be darkened by concerns over price inflation and the possibility of recession.
The pound was quoted at USD1.2327 at midday on Wednesday in London, down compared to USD1.2375 at the equities close on Tuesday. The euro stood at USD1.0895, higher than USD1.0861. Against the yen, the dollar was trading at JPY129.84, down compared to JPY130.17.
In the FTSE 100, Ladbrokes- owner Entain gained 2.0%, making it one of the best performers of the morning.
The London-based gaming and sports betting firm lifted its outlook following a World Cup boost.
Entain said it expects earnings before interest, tax, depreciation and amortisation for 2022 to be in the range of GBP985 million to GBP995 million. It had previously guided for a range of GBP925 million to GBP975 million.
At best, the new guidance represents a 13% rise from 2021’s Ebitda of GBP881.7 million.
For the fourth quarter of 2022, net gaming revenue rose 11% year-on-year and 7% at constant currency. Entain reported “record” online net gaming revenue. It rose 12% year-on-year, reflecting a “successful men’s World Cup, partly offset by weather disruptions to sporting fixtures”, Entain explained.
Looking ahead, Entain said it has started 2023 with “good momentum” across the business.
Telecommunications firm Vodafone was one of the worst FTSE 100 performers at midday.
It shed around 2.1%, after its CEO said “we can do better” as it reported that growth slowed in the third-quarter.
On an organic basis, service revenue rose 1.8% on-year during the quarter ended December 31. It had risen 2.5% yearly in the second quarter.
On a reported basis, service revenue was 1.3% lower on-year at EUR9.52 billion from EUR9.65 billion. Total revenue amounted to EUR11.64 billion, down 0.4% from EUR11.68 billion a year earlier, but up 2.7% on an organic basis.
“Although we’re continuing to target our financial guidance for the year, the recent decline in revenue in Europe shows we can do better. We need to do more for our customers by delivering quality connectivity in an easy way. We’ve already taken action, including simplifying our structure to give local markets full autonomy and accountability to make the best commercial decisions for their customers,” Chief Executive Margherita Della Valle said.
Della Valle became interim chief executive at the start of the year, replacing Nick Read who departed after just over four years in the top job.
interactive investor analyst Richard Hunter said: “[Wednesday’s] share price performance continues to reflect the enormity of the challenges ahead.
“Whether the newly appointed CEO can revitalise fortunes remains to be seen, but there is unquestionably a mountain to climb. As such, the jury remains out on immediate prospects, with the market consensus coming in at a hold, albeit a strong one.”
Vodafone backed its annual guidance, expecting adjusted Ebitda after leases between EUR15.0 billion and EUR15.2 billion. At best, that would be around the EUR15.21 billion achieved in financial 2022.
In the FTSE 250 index, London-based commercial property investor UK Commercial Property REIT lost 4.2%.
In the quarter to December 31, the company’s net asset value fells by 22% to 79.7 pence per share from 101.5p at September 30. NAV total return was negative 21%, compared to negative 7.9% a quarter ago.
However, the company reported a 12% rise in earnings per share to 0.82 pence as at December 31, up from 0.73p on September 30. It also declared a dividend of 0.85 pence per share for the quarter, up from 0.75p a year prior.
Brent oil was quoted at USD85.42 a barrel at midday in London on Wednesday up from USD85.27 late Tuesday. An OPEC meeting is scheduled for Wednesday.
Gold was quoted at USD1,929.43 an ounce up against USD1,927.04.
In addition to the Fed’s interest rate announcement, the economic calendar on Wednesday has a US manufacturing PMI and labour turnover survey.
By Sophie Rose, Alliance News reporter
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Less infamous but longer lasting has been the Halifax House Price Index which was established in January 1983 – the first such index to have mainstream currency.
Today we have a plethora of indices so it’s perhaps difficult to appreciate the impact when the Halifax measure first appeared.
Back then the average UK house price was £26,188 – yes, really – and Bank of England base rate was (wait for it…) 11.0 per cent.
Since then, average house prices have grown 974 per cent to £281,272 and today the base rate may be causing havoc for many but nonetheless sits at a more modest 3.5 per cent.
While the cost of buying a home was at its lowest when the Index began, looking over the past four decades, prices peaked in August 2022 at £293,992 – since then, the index has given four straight months of price falls.
Regionally, London was the most expensive place to buy a home in early 1983, as it is today. Properties in the capital were an average £36,056 in the first three months of that year, compared to £541,239 today.
Yorkshire and the Humber was the cheapest place to buy a property when the Index began (£20,332 then, £205,466 now), whereas the properties with the lowest average cost can now be found in the North East (£169,980 against £21,494 in Q1 1983).
In Scotland, the average property in the first quarter of 1983 was £26,411 vs £200,166 today.
In Wales, the average home now costs £217,547, compared to £21,388 forty years ago.
For Northern Ireland, those buying in the first three months of 1983 needed £23,383 on average, today it is £183,825.
The Halifax index – Britain’s oldest – was created for the media but, in the absence of other tools to measure house prices at the time, it quickly gained a powerful reputation and was used to inform the Bank of England’s monetary policy committee.
Because this significance as a tool for economists overtook its media profile, the index in 2015 was sold off to analytics company IHS Markit.
This firm still produces the monthly index today based on around 12,000 Halifax loan approvals each month, covering all 12 regions of the UK. This represents 15 to 20 per cent of all mortgage offers.
So the index remains effectively powered and sponsored by Halifax but is no longer compiled by the brand’s parent company, Lloyds Banking Group.
It’s now one of around 10 monthly house price measures so inevitably it’s less high profile than before.
Even so and just like Billy Joel, Culture Club, Duran Duran and Rod Stewart – all number one artists in 1983 – the Halifax is still around and well respected.
It could have been much worse … after all, the ill-fated Austin Maestro was launched in 1983 as well.
See you next week…
*Editor of Letting Agent Today and Landlord Today, Graham can be found tweeting about all things property at @PropertyJourn