Market Sector Update

• After starting 2020 strong, global real estate securities began to retreat in February as equity markets, commodities and sovereign yields all declined as the COVID-19 virus sparked concerns of a global slowdown and heightened probability of an outright recession. Global real estate securities declined 28% during the first quarter, while broader equities were down 21%.
• The demand shock from COVID-19 related containment efforts is expected to have a material adverse effect on global economy. The virus outbreak and corresponding containment efforts have prompted global governments and central banks to implement significant fiscal and monetary measures in an effort to provide relief to consumers and businesses and to support eventual recovery as business activity resumes.
• Real estate securities have not outperformed the broader equity market as would typically be expected in such periods of disruption, given the defensive nature of real estate’s contractual revenue and the sector’s attractive dividend yield. These defensive characteristics were more than offset by the rapid tightening of financial conditions, stemming from intense demand for liquidity, despite significant efforts from global central banks.
• Most regions and sectors declined in the quarter, but the dispersion of performance was wide. Performance varied by geography, property type, balance sheet strength, development exposure and tenant quality. In addition, real estate companies have taken swift action to shore up liquidity including withdrawing guidance, drawing on credit lines and reducing planned capital expenditures, while select companies have also suspended or reduced dividends.

Portfolio Strategy

• The Fund delivered a negative return, but outperformed its benchmark for the quarter.
• Relative performance for the period benefitted from positive stock selection effect in all three geographic regions, as well as positive regional allocation decisions. Stock selection effect was particularly strong in the U.S., Australia, Japan, continental Europe and the U.K.
• In the U.S., outperformance stemmed from an overweight position to the cell tower sector, which materially outperformed the broader real estate universe, given its a-cyclical nature and expectation for increased demand. Results also benefitted from underweight positions to select higher-levered shopping center and triple net lease companies, which underperformed as investors favored companies with stronger financial positions.
• In Australia, continental Europe, and the U.K., outperformance was driven by underweight positions to retail and tilts to the office markets in each region. Retail companies have lagged significantly as the sector was already under secular pressure prior to the forced closure of locations stemming from virus containment efforts. In addition, outperformance in Japan was driven by a tilt to the region’s developers which have outperformed with improved governance and an increased focus on shareholder returns.
• The Fund’s country allocations were adjusted during the quarter. An overweight position to Japan was increased, while its market weight position to Canada and underweight position to the U.S. were shifted to modest overweight positions. The Fund’s market weight position to continental Europe was transitioned to an underweight position. Underweight positions to Australia and Singapore were reduced during this period, while the overweight to the U.K. was reduced to a more modest overweight position.

Outlook

• Looking ahead, we believe a global recession, caused by the extraordinary efforts to curb the spread of COVID-19, is underway. With the duration of mitigation efforts unknowable, we are humble about our ability to accurately forecast the downturn and subsequent recovery. That stated, we have incorporated a baseline economic outlook reflecting a sharp decline in global gross domestic product (GDP) beginning in the second quarter of 2020, followed by a “U” shaped recovery beginning in 2021.
• The public real estate market has experienced a significant re-pricing. As a result, the real estate security universe is now trading at significant discounts to our net asset value estimates, or where we believe the company portfolios would trade in the private real estate market.
• The vast majority of the listed real estate companies enter this recession with strong balance sheets and ample liquidity. Moreover, companies have reacted swiftly to the seismic shift in economic conditions and moved to augment and preserve liquidity. Strong capital foundations position these companies to weather the storm and eventually deliver attractive investment returns when the global economy can return to normalcy.

The opinions expressed are those of the Fund’s managers are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

Benjamin Lentz, CFA and Paul Meierdierck, CFA were named co-portfolio managers in January 2020, replacing George J. Noon, CFA, who left the firm.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Fund is non-diversified, meaning that it may invest a significant portion of its total assets in a limited number of issuers, and a decline in value of those investments would cause the Fund's overall value to decline greater than that of a more diversified portfolio. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/dealers.