Virtus Viewpoints
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Q4 VIRTUS VIEWPOINTS 19 QUARTERLY COMMENTARY Virtus Duff & Phelps International Real Estate Securities Fund A: PXRAX (92828R750) | C: PXRCX (92828R743) | I: PXRIX (92828R735) MARKET REVIEW > From a country allocation perspective, our overweight exposure International equity markets finished the year on a strong note, to Ireland was the largest detractor from performance. Ireland’s benefiting from the U.S. and China Phase One trade accord and a underperformance was driven by the decline in the shares of positive outcome in the UK elections. With an 8.2% quarterly Irish Residential Properties, as the market reacted negatively to total return for the MSCI EAFE Index, expressed in U.S. dollars, the potential for a residential rent freeze to be enacted in international equities made up for a softer start to the year. Dublin, similar to what has occurred in Berlin. The second Conversely, international real estate equities delivered a 5.6% largest country allocation detractor was our lack of exposure to total return for the quarter, as measured by the FTSE EPRA Nareit Switzerland, which outperformed during the period. The Developed ex US Index (Benchmark), expressed in U.S. dollars. increase in the Swiss franc relative to the U.S. dollar during the For the full year, international real estate equities posted a very period was a contributing factor in this performance. healthy 21.0% total return. > At the security level, our overweight exposure to Nippon As global equities markets rallied, global interest rates also moved Prologis REIT, a Japanese industrial REIT, was the largest higher on the back of the news and improved sentiment in global negative contributor to security selection. Shares of the economic growth. The U.S. dollar declined by 3.0% in the company did not underperform for any company-specific reason quarter, as measured by the U.S. Dollar Spot Index, which but were affected by the pullback of many JREIT stocks during benefited international equity returns. Global central banks the period. Our overweight position in Kenedix Residential, a continued to support further global economic expansion and will Japanese apartment REIT, was the second largest detractor to likely be supported by fiscal policy in the year ahead. security selection. The company experienced some profit taking The five top-performing countries on a total return basis measured in the fourth quarter after a strong 2019 price appreciation. It in U.S. dollars were the UK, Austria, Italy, France, and Sweden. has strong presence in the Tokyo residential market where The UK delivered robust performance during the period with a supply is very tight and occupancy is in the 97% level, which is total return of over 20%, on a U.S. dollar basis. The outcome of driving solid cash flow growth. the UK elections was undoubtedly the primary driver of this INVESTMENT OUTLOOK performance and benefited both local market returns and drove a Looking ahead, we expect continued variance in the global sharp rally in the British pound relative to the U.S. dollar. economic growth picture and regional real estate fundamentals. Bottom performers included Israel, Ireland, Japan, Canada, and Regionally, we are looking to the U.S. and Ireland for economic New Zealand. Several of the underperforming markets during the growth leadership. We expect the variance in global growth period were negatively impacted by a rotational drag from winners trajectories to create opportunities for active managers such as or a shift to a more “risk-on” environment, as market sentiment ourselves, who are focused on high quality owner-operators of and global interest rates lifted. enduring real estate, with solid balance sheets and proven management teams. Overall, we expect cash flow and dividend PORTFOLIO REVIEW growth for global real estate securities to continue to be solid Overall, the Fund outperformed the Benchmark in the fourth in 2020. quarter. Country allocation and security selection both contributed positively to performance. Our base case total return drivers for global real estate in 2020 include: > From a country allocation perspective, our strongest contributor was the UK. We have been overweight in the UK and benefited > An attractive estimated cash flow growth of 4-5%. from this positioning during a strong performance period for the > Dividend yield of approximately 4%, with dividend growth country. Our second largest allocation benefit was from our expected to be in line with underlying cash flow growth. underweight exposure to Japan, which was a bottom-performing > Healthy demand, increasing rents, and manageable new supply country during the period. driving cash flow and dividend growth. > At the security level, our overweight position in Workspace > From a global perspective, real estate fundamentals remain Group, a UK office REIT, was the largest positive contributor. more attractive for the industrial/logistics and data center Shares of the company performed strongly during the quarter, property sectors with secular tailwinds from ecommerce and driven by positive earnings results and improved sentiment for the cloud. UK real estate and the British pound following the positive Overall, we believe the global real estate market cycle still election outcome. The next largest positive contributor was has room for further growth against a backdrop of solid Unite Group, a UK student housing company that continues catalysts that underpin our base case. to benefit from an undersupplied student housing market and acquisitions, which is driving above average growth. Q4 19 VIRTUS VIEWPOINTS QUARTERLY COMMENTARY Virtus Duff & Phelps International Real Estate Securities Fund INVESTMENT ADVISER PORTFOLIO MANAGERS TOP TEN HOLDINGS % Fund Virtus Investment Advisers, Inc. Frank J. Haggerty, Jr., CFA Mitsubishi Estate Co. Ltd. 6.61 Industry start date: 1996 Vonovia SE 4.67 INVESTMENT SUBADVISER Start date as Fund Portfolio Granite Real Estate Investment Trust 3.80 Manager: 2007 Link REIT 3.45 Duff & Phelps Investment Management Co. Geoffrey P. Dybas, CFA The Unite Group PLC 3.29 Industry start date: 1989 Kungsleden AB 3.24 Start date as Fund Portfolio Merlin Properties Socimi SA 3.19 Manager: 2007 Unibail-Rodamco-Westfield 3.15 Invesco Office J-Reit Inc. 2.95 Swire Properties Ltd. 2.91 Holdings are subject to change. AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/19 TOP FIVE CONTRIBUTORS % Contribution 1 3 5 10 Since Inception Workspace Group PLC 0.82 QTD YTD Year Year Year Year 10/1/2007 The Unite Group PLC 0.75 Fund Class I 7.25 27.90 27.90 13.79 8.25 9.19 3.88 Safestore Holdings PLC 0.59 Index 5.56 20.96 20.96 10.76 5.79 6.85 1.63 Kungsleden AB 0.51 Derwent London PLC 0.45 Performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth TOP FIVE DETRACTORS % Contribution more or less than their original cost. Current performance may be lower or higher than the performance Nippon Prologis REIT Inc. -0.18 data quoted. Please visit virtus.com for performance data current to the most recent month end. This share class has no sales charges and is not available to all investors. Other share classes have sales Kenedix Residential Next Investment Corp. -0.13 charges. See virtus.com for details. Irish Residential Properties REIT PLC -0.09 The fund class gross expense ratio is 1.44%. The net expense ratio is 1.25%, which reflects a contractual Link REIT -0.09 expense reimbursement in effect through 1/31/2021. Invincible Investment Corp. -0.07 Average annual total return is the annual compound return for the indicated period and reflects the change in share price and % Contribution: Absolute weighted contribution. the reinvestment of all dividends and capital gains. Returns for periods of one year or less are cumulative returns. To obtain the top/bottom holdings calculation Index: The FTSE EPRA Nareit Developed ex-U.S. Index (net) is a free-float market capitalizationweighted index measuring methodology, call 800-243-4361. publicly traded equity REITs and listed property companies from developed markets excluding the United States, which meet minimum size and liquidity requirements. The index is calculated on a total return basis with net dividends reinvested. The MSCI EAFE Index (Europe, Australasia, Far East) (net) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The indexes are calculated on a total return basis with net dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment. Notes on Risk: Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund. Real Estate: The fund may be negatively affected by factors specific to the real estate market, including interest rates, leverage, property, and management.Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. Prospectus: For additional information on risks, please see the fund’s prospectus. Please consider a Fund’s investment objectives, risks, charges, and expenses carefully before investing. For this and other information about any Virtus Fund, contact your financial representative, call 800-243-4361, or visit virtus.com for a prospectus or summary prospectus. Read it carefully before investing. Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee.