The case for active management in AREITs
The common perception is that value cannot be added in the AREIT (Australian Real Estate Investment Trust) asset class, though perhaps this needs to be re-examined. In fact, the better active managers have shown a consistent track record of beating the benchmark.
So why does active management work in AREITs for these better managers and what characteristics should long-term investors be looking for?
For active management to add value as an investment approach, there needs to be sufficient dispersion of returns. The case for active management in AREITs recognizes that the underlying stocks within the asset class are not homogenous. A key driver behind these dispersions in returns is the increasing variety of income streams and strategies that exist within the AREIT market. The underlying trusts and companies within the AREIT asset class derive their income from a multitude of sources, including the passive approach of rent-seeking, but also more active sources including residential development, funds management and commercial development. Some stocks even have currency exposure via their ownership of overseas assets, albeit this is now largely limited to Westfield Corporation and Goodman Group as most other groups disposed of their offshore assets post the GFC. There are different sub-sectors within the asset class itself and there is even the variance of economic growth rates in different states. All these combine to create that important dispersion of returns that a quality active manager can exploit.
A second observation is around the concentration within the asset class itself, given that the top 5 stocks account for 65% of the underlying index. While this observation is valid from a top-down perspective, it’s also important to recognize the longer tail of smaller stocks, some even outside the index, that are available as investment candidates to the active manager. These tend to be under-researched, under-owned and offer a diversity of both asset class and strategy that also leads to a significant dispersion of returns. This offers further opportunity for active managers with the right investment approach that can take advantage of these inefficiencies.
An active manager like Renaissance, which manages the Zurich Investment Australian Property Securities Fund, has many of the characteristics that should be attractive to a long-term investor in the asset class. They are a highly experienced team, focused solely on the asset class in Australia and with a long track record that has successfully navigated multiple market environments, including the turbulence of the GFC. The conviction behind their process and stock selection is driven by the depth of their own research, including into smaller stocks, which has allowed them to deliver index-beating returns over the long term.
Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated 14th April 2016, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance. GINN FVHHKJ.00012.ME.036.