Dugald Higgins

Zenith’s 2017 Property Sector Review incorporates both global and domestic Real Estate Investment Trusts (REITs) and other listed property related companies, and spans both active and passive managed funds.

A common theme across the broader sector over the past year has been subdued performance; while the relative performance of active fund managers is influenced by cyclicality, the new low growth/ low rate world has proven challenging for asset managers to navigate.

Dugald Higgins, Senior Investment Analyst, commented: “The impact on asset prices from highly accommodative monetary policy remains problematic.”

“This was particularly true for managers with a quality bias seeking to generate excess returns in a market where investors continue to move up the risk curve in search of yield.”

“A range of geo-political events and changing market expectations has also impacted both global and Australian REITs during 2016, which could easily be dubbed ‘the year of the unexpected’.”

Zenith’s report suggests the increased occurrence of global geo-political events, continued un-conventional monetary policy, and the prospect of rising bond yields should not be taken lightly in REIT markets.

Active Share and REITs

Zenith’s report also focuses attention on the use of the Active Share calculation, the share of a portfolio’s holdings that differ from the benchmark.

“Using this measure, it’s possible to determine where an actively managed fund is positioned in the context of being highly active or highly index-like,” said Higgins.

“As with Tracking Error, some level of Active Share is a prerequisite to outperforming a benchmark, although neither high Active Share or Tracking Error will automatically result in alpha generation.”

Zenith’s analysis found that while the results show a visible relationship between increasing Active Share and performance, care needs to be taken in its interpretation.

“Advisers should be cautious in drawing too close a parallel between Active Share and results; two of the top performing Funds in the Zenith peer group had below median Active Share,” said Higgins.

“Strong performance is not necessarily reliant on high Active Share and likewise, positive Active Share does not automatically equate to improved performance outcomes.”

Active Share outcomes tend to vary according to the asset class and opportunity set available. A benchmark universe with 100 companies versus one with 3,000 companies will obviously find it more difficult to deliver high Active Share, as will sectors with high levels of stock concentration.

“This is highlighted by the active share across GREIT managers within Zenith’s rated universe – on average, active share is substantially higher when compared to their AREIT counterparts, largely due to the broader investable universe,” commented Higgins.

While the usefulness of Active Share as a predictive measure of performance is often debated, its usefulness as an additional tool to measure variance in portfolios should not be ignored.

“Along with Tracking Error, Active Share provides useful intelligence for judging the value proposition of a fund regarding fees; paying active fees for very low Active Share is unlikely to be an attractive value proposition for investors,” concluded Higgins.

Summary of the Zenith 2017 Property Sector Review

From an initial universe of 77 products:

• 4 were rated “Highly Recommended”
• 18 were rated “Recommended”
• 10 were rated “Approved”
• 44 were “Not Rated”
• 1 was rated “Redeem”

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