Lonsec releases its 2010 Australian Property Securities Funds Sector Review


Lonsec’s 2010 review of the Australian Property Securities sector included 19 funds, of which only one attained Lonsec’s top rating, Highly Recommended. This was the Vanguard Property Securities Index Fund.

Three funds were added to the sector – the Aviva Investors Listed Property Fund, the Legg Mason Property Securities Fund, and the Macquarie Master Property Securities Fund.

Thembi Matabiswana, Investment Analyst with Lonsec commented, “Each of these new funds attained a Recommended rating, reflective of the quality of the investment teams and robust investment processes.”

Key themes to emerge from this sector review

The tables have turned – positive returns

The Australian Property Securities (A-REITs) sector has seen a steady improvement since the heavy falls experienced during the global financial crisis.

“Since March 2009, there has been a re-rating of the sector and while safe haven A-REITs had been the best performers during the depths of the financial crisis, there was a distinct change in the latter half of last year, with a number of smaller highly geared stocks bouncing back strongly,” observed Matabiswana.

The A-REITs sector has delivered a total return of 37.8% over the 12 months to 31 May 2010 (as measured by the S&P/ASX 300 A-REIT Accumulation Index).

“While all managers posted positive returns, there was quite a spread in the range of performance; those managers with broader mandates allowing allocation to smaller stocks were the beneficiaries. Over a three year period (ending 31 may 2010) however, those Property Securities Funds more defensively positioned performed better,” said Matabiswana.

A stock picker’s game

During the last three years, the A-REITs sector has experienced an unprecedented level of volatility.

“The sector has polarised since Lonsec’s last review, with over a 100% performance difference between the top and bottom performing stocks in the 12 months to 30 June 2010,” noted Matabiswana.

“Interestingly, Westfield Group – which accounts for more than 30% of the index – was one of the worst performing stocks over the period. However, mandate restrictions mean that fund managers continued to hold Westfield in their portfolios.”

Funds under management – blessing or curse?

During 2009, the A-REIT sector raised significant levels of capital to repair highly leveraged balance sheets.

“A spate of capital raisings saw managers tactically structure portfolios to take advantage of mis-pricings and arbitrage opportunities,” said Matabiswana.

“Managers with larger funds under management (FUM) were in better standing during capital raisings as their larger FUM meant they were first in line to get stock.”

Despite this, the nimbleness of smaller managers meant they could move in and out of the less liquid stocks. These smaller funds have significantly outperformed their larger counterparts, demonstrating that the nimbleness of small FUM was a bigger advantage than preferential access to capital raisings at a discount.

Loss of talent

Over the past two years there has been quite a loss of talent from those managers making up Lonsec’s peer group in this sector.

“Senior analysts and portfolio managers are steadily leaving the sector in search of prospects elsewhere,” said Matabiswana.

“In most cases, those leaving aren’t replaced – rather, the role is filled internally. While there are many positives in appointing internally, the biggest detractor is the loss of valuable experience in the A-REIT sector.”

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 (“Lonsec”) and should be read before making any investment decision about the product(s).
Disclosure at the date of publication: Lonsec receive a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. Lonsec’s fee is not linked to the rating outcome. Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s).
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness.  If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product.
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