Leading research house Lonsec has warned investors to stay alert for structural risks in Australian REITs as the sector continues to rebuild and prosper.

Lonsec’s 2014 A-REIT Sector Review, released today, showed Lonsec’s peer group of active A-REIT managers achieved returns of 12.7% over the year to 30 June 2014 and 15.4% annually over five years. Investors also enjoyed an annual distribution rate of more than 5%.

However the report also identified several ongoing risks in the sector including significant concentration risk across all 23 funds surveyed, and ongoing shrinkage in the sector due to corporate activity.

Peter Green, Senior Investment Analyst at Lonsec and principal author of the report, said the sector “continued to perform in a stellar fashion in 2013-14.”

A-REITs’ strong returns are the result of several factors. The sector has benefited from cheap funding and a fall in capitalisation rates due to the decline in government bondyields. Valuations of properties have been boosted by strong demand for institutional grade assets from both listed and unlisted entities.

In terms of ratings of the 23 A-REIT funds assessed in the report, there were five upgrades and four downgrades. Of the five that were upgraded, one – BlackRock Indexed Australian Listed Property Fund – was assigned Lonsec’s premier ‘Highly Recommended’ rating.

Flagging risks

The report found that there was significant concentration risk across all 23 funds surveyed. Because of the structure of the A-REIT sector, each of the funds typically has a substantial exposure to a small number of securities. At the end of July 2014, the ten largest stocks accounted for around 89% of the capitalisation of the S&P/ASX 200 A-REIT Accumulation Index (XPJ). The five largest names accounted for about 62%. These figures have remained broadly unchanged over the last year.

A related challenge has been the shrinkage of the sector over the last year thanks to corporate activity and the potential that Westfield Corporation (WFD) could redomicile to the United States. Lonsec believes that this will place greater emphasis on capacity management as a driver of success for fund managers in the sector. Some managers may find that their relatively large size makes it harder for them to generate alpha.

Lonsec notes that investors, and their advisers, need to remember that A-REITs are listed securities and that returns will be subject to normal equity market risks. Some stapled securities, such as Mirvac (MGR) and Goodman Group (GMG) also have large exposures to cyclical earnings streams from property development and asset management. The sector has, however, had a more defensive nature for some time, thanks to the A-REITs’ ‘back to basics’ approach following a disastrous period during the global financial crisis.

“In short, concentration risk is not the only issue that investors need to consider when investing in the A-REIT sector”, said Mr Green. “Nevertheless, the changes to capital structures that were undertaken by corporate managements following the global financial crisis laid the foundations for the strong absolute returns that have been achieved in recent years.”

Active versus passive

Within the A-REIT sector, the average Lonsec manager has been able to justify their ‘active’ fees charged – having generated alpha of 1.1% annually over five years and 1.6% in the 12 months to the end of June. Active managers have successfully fought back against the low cost index strategies that have proliferated over the period.

Lonsec noted that, in a fee competitive environment, A-REIT funds increased their ‘active share ’(i.e. the percentage of the portfolio that differs from the relevant benchmark) through 2013: in particular, more ‘benchmark aware’ managers (i.e. those that face the greatest competition from low cost index funds and exchange-traded funds) made a concerted effort to lift their level of active share.

Nevertheless, Lonsec is agnostic about the ‘active versus passive’ debate in the A-REITs sector. Lonsec accepts that, for more fee conscious investors, an index approach to A-REITs can make sense if investors are comfortable holding such a large exposure to the retail sector.

Conversely, Lonsec believes that investors who are looking for alpha from their A-REIT exposure should consider an active manager. “There are several aspects that we seek from active managers”, notes Mr Green. “These include experience ‘through the cycle’, as well as proprietary commercial property experience. We also look for a less ‘benchmark aware’ approach, which means that the manager can take meaningful positions away from the ‘top ten’. Finally, we like to see the depth of research coverage, so that the manager can thoroughly investigate smaller, or non-index, opportunities.”

 Other key findings of the report include:

• There have been limited new entrants in the sector outside of the ETF/index space.
• Many A-REIT fund managers that are focusing on the sector have been creative in attempts to reduce concentration risk. Some have invested in globally listed property securities or listed infrastructure securities. Others have taken larger active positions in A-REITs that lie outside the ‘top ten.’
• The merger of Westfield Retail Trust (WRT) with Westfield Group’s (WDC) Australian and New Zealand businesses to form Scentre Group (SCG) reduced the need for the A-REIT fund managers to spend a disproportionate amount of time analysing one stock. Before the deal, WDC and WRT accounted respectively for 27% and 10% of the benchmark. Afterwards, SCG accounted for 19% of the index; the slimmed down Westfield Corporation, for 16%.

The post Lonsec flags risks in stellar A-REITs sector appeared first on AdviserVoice.

Alex Vynokur

Australian exchange traded fund investors are favouring defensive cash and yield-oriented funds, with approximately $135 million flowing into these products in April, according to the monthly BetaShares Australian ETF Review.

Another record month saw the Australian exchange traded product (ETP) market break through the $11 billion barrier in funds under management at the end of April. The market grew by 4.3% in the month, and has now grown approximately 50% over the last 12 months. Total monthly market growth amounted to $452 million with approximately $300 million of growth coming from new money inflows.

Highlighting investor appetite for yield, Australian high yield equities products were the most popular product category by inflows during April, while the top individual product for net inflows was the Cash ETF.

“Exchange traded products in Australia are increasingly becoming mainstream, with assets under management expanding rapidly. Growth is being driven by an increase in confidence around global markets as well as familiarity by investors with exchange traded funds. Growth continues to be strongest in domestic and international equities, high yield and cash oriented products,” Mr Vynokur said.

Net outflows were virtually non-existent in April, with small outflows recorded in gold exposures.

“ETPs make it easy for investors to access a range of targeted exposures, and to implement portfolios strategies consistent with their views on the market. April’s outflows were minimal suggesting a bullish sentiment towards exposures across most asset classes,” said Mr Vynokur.

In terms of performance, two of the top five products for the month were commodities based while A-REITs also rallied.

“Commodities-based exposures have consistently been amongst the best performing asset class each month this year to date, despite trading activity in these funds being low. This suggests investors are missing out on potential opportunities available from the commodities asset class,” he concluded.

The post BetaShares Australian ETF Review April 2014 appeared first on AdviserVoice.

A strong recovery for the A-REIT sector.

Investment research house Lonsec Research Pty Ltd (Lonsec) said Australian listed property securities funds have seen a strong recovery in performance across the Lonsec peer group over the last 12 to18 months, as fund managers benefit from a rebounding A-REIT sector.

In particular, the headline S&P / ASX 200 A-REIT Accumulation Index (XPJ) rose by 24.2% over the twelve months ended 30 June 2013, with the Lonsec ‘actively managed’ peer group recording a commensurate annual return of 24.1%. This strong performance has seen the A-REIT sector outperform both the global REIT sector and the broader Australian equity market over this time period.

The Lonsec Australian Listed Property Securities Sector Review, which covered 22 actively managed funds, five ‘passively managed’ funds and five ‘hybrid’ funds, found the sector has recovered from the losses experienced during the global financial crisis (GFC).

Peter Green, Senior Investment Analyst, Lonsec said there were three key factors contributing to the recent performance.

“The global quest for yield in a low interest rate environment has had quite an impact, with offshore and local investors attracted to the sector by the strong distribution rate.”

“This, coupled with the favourable earnings outlook across the A-REIT sector, has also underpinned recent investor support, with the sector awash with ‘cheap’ debt and equity that has significantly lowered the cost of capital and will allow A-REITs to accelerate their development pipeline,” Mr Green said.

“Finally, institutional interest has been a strong tail wind for listed fund managers such as Goodman Group and Charter Hall Group.”

Sins of the past

Lonsec noted in last year’s sector review that strong balance sheets had again become a feature of the A-REIT sector, following a prolonged period of sector-wide austerity.

“A-REIT boards continued their efforts unwind the aggressive capital structures evident in the lead up to the GFC, including selling non-core assets and exiting offshore property platforms,” said Mr Green.

“While these exhaustive efforts have led to A-REITs being able to raise their creditworthiness, the past continues to haunt fund managers in longer-dated returns.”

“For instance, the Lonsec ‘active’ peer group still has a seven year negative absolute return; therefore, the strong performance of the last 12-18 months is coming off a low base and the average long-term investor has underperformed the broader Australian equity market.”

Back to the future

Much has been made of the ‘back to basics’ approach adopted by current A-REIT boards, with strong sector returns over the last few years being the reward.

“We observe that the current quest for yield across the sector is a similar thematic to that which drove much of the excesses in the lead up to the GFC,” said Mr Green.

“More recently, the sector has seen a return of Initial Public Offerings (IPOs) promising to deliver yield, a rise in pay-out ratios and a move across the sector to sell stakes in key assets to third parties.”

“In this environment, stock picking may well be a significant driver of alpha, which in turn may prove a fillip for the more experienced active teams with ‘through the investment cycle’ knowledge of the sector,” Mr Green said.

The post Australian listed property securities funds – the year of absolute recovery appeared first on AdviserVoice.

The risk vs. return analysis is developed annually as a practical reference tool for advisers and investors, charting the annual returns of different asset classes over the last three decades. The analysis demonstrates how the returns of various asset classes differ significantly year to year and over the long-term.

While A-REITs achieved an impressive 32.8% return in 2012, making up for losses in previous years, the long term perspective of Russell’s analysis highlights the importance of investing in a well-diversified, multi-asset portfolio.

Despite month to month volatility from concerns about Europe, U.S. fiscal cliff negotiations and a Chinese slow down, most asset classes returned at least high single digit if not double digit returns in 2012. Australian equities and global shares (hedged) delivered nearly 20% and global shares (unhedged) delivered 14.7%, pushing the 2011 performance winners – Australian and international bonds – from the top spots. Even with this fall, bonds returned solid results with Australian bonds at 7.7% and international bonds at 9.7%.

Once again, those ‘playing it safe’ by sitting on the investment sidelines in cash during 2012 would have missed out on the strong performance of growth assets, with cash only returning 4%.

Director of Client Investment Strategies at Russell Investments Scott Fletcher said: “The risk-on, risk-off volatility is likely to continue in the foreseeable future and the risk vs. return analysis demonstrates the value of diversification, particularly in this environment. The results of the analysis continue to support our belief that a well-diversified, multi-asset portfolio which adapts to a changing environment, is the best way to more consistently achieve investors’ goals.”

The post A-REITS take top spot appeared first on AdviserVoice.

The S&P/ASX 300 AREIT Index shrunk in terms of both constituents and market capitalisation during 2011. 

S&P fund analyst, Peter Ward said: “Overall, we find A-REIT fund managers investing in A-REITs that now have generally more conservative, real estate-focused management, stronger balance sheets, lower exposure to offshore assets, and greater reliance on rental cash flows than was the case in preceding years. In the words of one A-REIT fund manager, ‘boring is the new black’.” 

“As well as focusing on the real estate opportunities that many A-REITs are well-positioned to take up, active A-REIT fund managers are looking to take advantage of other sector changes, including corporate activity, which some funds benefited from during 2011. A-REIT initiatives can also include divestment of non-core real estate assets and share buybacks to improve shareholder value,” said Mr. Ward. “Sector headwinds prevail, however, with ongoing global macroeconomic issues contributing heavily to an uncertain investment environment,” he added.  

Key themes discussed in the report are: 

• S&P awarded its first five-star ratings in the A-REIT sector in over five years. BT Property Investment Wholesale Fund and BT Property Securities Wholesale Fund both received five-star ratings.
• APN Funds Management, Legg Mason Asset Management, and UBS Global Asset Management all experienced significant investment team changes in the past year, while AMP Capital decided to bring the management of its global property securities capability in-house. The changes at UBSGAM and AMP Capital resulted in their respective fund ratings being placed ‘On Hold’.
• Antares Capital Partners (formerly Aviva Investors Australia) was acquired by National Australia Bank in October 2011. No rating action was taken.
• The S&P/ASX 300 A-REIT Index outperformed the broad equities S&P/ASX 300 Total Return Index by over 9% for the year to Dec. 31, 2011, but it trailed the S&P ASX 300 Accumulation Index equities by almost 13% over five years.
• The Australian property-securities sector performance over the year to Dec. 31, 2011, was disappointing, with the S&P/ASX 300 A-REIT Index reporting -1.56%.
• Benchmark-unaware funds benefited from their structural underweight positions to Westfield Group which underperformed other A-REIT stocks.

The post A-REIT sector changes mean opportunities for some, says S&P appeared first on AdviserVoice.

In its first quarter update to investors, the AAIC has decided to maintain a neutral stance on Australian equities, hold an overweight to income securities and maintain listed property allocations at zero across all of Implemented Portfolios’ individually managed accounts.

According to AAIC member Jon Reilly, Australian Equities will be supported by continued demand for resources from China, India and other emerging markets, whilst the banks may have slow growth but will still provide solid returns underpinned by their dividends.

“This quarter we have determined to move towards a lower allocation in international equities, but will do gradually, taking advantage of further strength to lock in returns.”

“This is consistent with our investment strategy of buying when we view classes as fair value or undervalued and selling incrementally as they become more expensive,” Mr Reilly said.

Continuing to favour income securities over cash, the AAIC has held its overweight position and maintains a preference for securities issued by the major banks.

The committee’s assessment of A-REITs last quarter was that they were expensive and the outlook was likely to remain subdued. This assessment has not changed in the first quarter, and the portfolios have now moved to a 0% allocation to listed property.

“The AAIC’s decisions this quarter reflect the continued need to be cautious. We have positioned the portfolios defensively but will add to equities allocations when valuations become more attractive. On balance the portfolios will continue to capture the growth from Australian equities, and consistent distributions from the income securities exposure.” he said.

“In 2011 we expect there will be continued sluggish economic growth in the developed world, and significant risks from managing the build up of debt in those countries. Whilst growth rates will be better in emerging markets we are conscious that valuations are no longer as attractive as they once were, which will likely suppress longer term returns.”

The AAIC is comprised of a team of professional managers that make implementation and investment decisions for Implemented Portfolio’s range of Individually Managed Accounts. The quarterly update is the AAIC’s long term assessment of each asset class amid the broader context of the economic environment and investment markets.

The post Defensive strategies drive allocations for Implemented Portfolios appeared first on AdviserVoice.