OneAnswer KiwiSaver Scheme International Property Fund

• The international listed property sector had a challenging quarter, hampered by a sharp rise in global bond yields. The listed property sector is particularly sensitive to rising bond yields, for a number of reasons, including that it provides steady, predictable cash flows that are similar to bonds. When bond yields rise, property assets may seem less attractive in comparison. Also, rising bond yields suggests rising interest rates, which increases corporate borrowing costs.
• During the quarter, the yield on the US 10-year government bond rose 79 basis points to 4.57%. While the US Federal Reserve delivered two interest rate cuts of 25 basis points each, it said that slower progress on inflation, strong growth and relatively stable unemployment meant interest rates are likely to fall more slowly than previously expected.
• All geographic regions delivered negative returns over the quarter (in local currency terms), with Canada the worst performer. The region is experiencing declining economic growth, and the implementation of more restrictive immigration policies is likely to negatively impact rental growth prospects across multiple property sectors. Elsewhere, a souring macroeconomic backdrop amid heightened political uncertainty was a major theme across Europe and the UK. Japan delivered the smallest losses, helped by the strength of it broader share market, which gained on the back of a weak yen.
• Having the biggest positive contributions on the fund’s relative performance were two of its longstanding holdings, Welltower and Ventas, both of which operate in the healthcare sector. Shares in the companies were up 12% and 5% respectively, as the healthcare sector continues to benefit from a cyclical post-Covid recovery, secular demand tailwinds, and an improving supply backdrop.
• Also contributing positively was the fund’s overweight to the strong-performing data centre sector. Notable performers were Digital Realty Trust and Equinix, whose shares were up 25% and 21% respectively. Most companies in this sector published their third quarter results, with many seeing strong revenue growth and all of them targeting further expansion. Equinix also announced a $15bn joint venture with two overseas investors to build hyperscale data centres in the US.
• An overweight to the retail sector also helped, with its holdings in Federal Realty Investment Trust and Kimco Realty – both notable performers – up 11% and 15% respectively. That said, Simon Property Group, which invests in shopping malls, outlet centres and community centres, was one of the fund’s weakest performers over the quarter.
• Also offsetting some of the positives was weak company selection within the fund’s residential holdings, and a couple of its holdings in self-storage companies, namely Big Yellow Group and Public Storage. It followed a string of weak third-quarter results, with many companies in this sector reporting negative occupancy and growth. It also reflects a weaker growth environment as these companies head into the slower winter season.

The fund invests mainly in international listed property assets. Investments may include:

• Companies, funds or trusts that invest in property and are listed or are soon to be listed
• Cash and cash equivalents.

This chart shows the mix of assets that the fund generally intends to invest in – 100% listed property.

See the fund's actual investment mix on page 3 of the fund update.