Ashton Reid

Recent earnings season revealed a shift in the business community’s thinking about inflation, with many company executives now expecting the rate of growth in inflation to accelerate through the rest of the year. Investors need to adjust their thinking in response to this development, says Martin Currie Australia, part of the Franklin Templeton Group.

Ashton Reid, portfolio manager of the Martin Currie Real Income Fund, says many of the real asset companies have emphasised the growing impact of inflation across their supply chains and their labour forces. Those that have not yet seen a direct impact are reporting clear expectations of an acceleration through the year.

For investors, a tightening of monetary policy in response to accelerating inflation would see an increase in bond yields and, generally, downward pressure on equity values. This is because companies will likely experience increases in costs, which can put pressure on profit margins.

Reid says: “It is a challenging landscape, but we believe real assets provide a compelling inflation-protected investment opportunity, as well as meaningful income upside potential.”

He says the Martin Currie Real Income Fund has been positioned to benefit from rising inflation since early in 2021.

“We have been focused on owning real assets with inflation protection mechanisms and strong pricing power that should exhibit meaningful cashflow growth as inflation rises.”

Shopping centers, toll roads and regulated utilities can benefit from inflation pass-through mechanisms. Many have rents, tolls or charges linked to the Consumer Price Index (CPI) or have rents that are closely correlated to tenants’ sales. They will see higher cashflows as prices rise and revenues are boosted.

Reid says: “A company with strong pricing power will be able to pass costs through to consumers, allowing them to control their margins. What investors must determine is to what extent consumer demand will be affected by companies passing on costs in an inflationary environment.”

One of the Real Income Fund’s biggest holdings is toll road operator Transurban. Its tolling mechanisms are mostly linked to Australian and US CPI. “Our view is that Transurban’s higher toll prices remain affordable in the context of inflation-driven rice increases. People are more likely to pay higher tolls than spend longer on crowded un-tolled roads,” Reid says.

Some real estate segments, such as retail, can provide solid inflation protection. Another of the Fund’s larger holdings is regional and super-regional shopping center operator Scentre Group.

As COVID restrictions have eased, Scentre has seen foot traffic and tenant sales recover quickly. Strong tenant occupancy trends translate into the power to push up rents as tenant sales grow. The company’s recent results demonstrated a strong ability to maintain yields.

Reid says: “One of the key portfolio positioning decisions we have made is to reduce our exposure to less-inflation protected CBD-based office assets, in favour of everyday needs assets. We reduced our exposure to stocks such as Mirvac Group and Dexus Group and increased our exposure to Charter Hall Social Infrastructure and toll road company Atlas Arteria.”

The Fund returned 21.7% (net) over the 12 months to the end of February. Past performance is not an indicator of future performance.

Highlights – Martin Currie Real Income Fund:

• Investment Objective: The Fund aims to provide a pre-tax income yield above the S&P/ASX 200 Index yield and to grow this income above the rate of inflation.
• Invests in Australian listed companies owning real assets (such as property, utility and infrastructures securities) that deliver strong dividend income from reliable revenue streams.
• Targets income growth that exceeds the rise in the cost of living by owning securities that can grow revenue and profit over time.
• Total Assets under management: $976.71 Million (as of 31/03/22).

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Launched in 2010, Legg Mason Martin Currie Real Income Fund has built a long-term record of success in delivering high, sustainable and growing income alongside capital growth. In pursuing its objectives, the Fund invests in a mix of Australian listed companies that own hard, physical assets, such as property, utilities and infrastructure.

Its Active ETF version – the Betashares Legg Mason Real Income Fund (managed fund) (ASX: RINC) has also been awarded ‘Highly Recommended’ rating and was listed on the ASX in February 2018.

Supporting the ratings is Lonsec’s “high regard for the Martin Currie Listed Real Assets investment team” and “the disciplined investment process”.

Lonsec notes that the “Real Assets team are very experienced, and the portfolio managers have good tenure of working together”.  Ashton Reid is the Lead Portfolio Manager of the Fund is supported by Andrew Chambers and the broader investment team based in Melbourne and led by CIO, Reece Birtles.

In its report, Lonsec made note of the ESG integration within the Fund stating: “The Manager has clearly articulated a strong commitment to the integration of ESG within their investment process with a strong policy framework and clear public positioning.”

“Overall Lonsec views the strength of this commitment to be well above peers.  Lonsec’s review of the overall level of disclosure with respect to the Manager’s proxy voting and engagement, policies and reporting are assessed as industry leading, with particular credit paid to the details and clarity provided in the Manager Proxy Voting Policy.”

They added: “The Portfolio Managers demonstrated an ability to engage on broad ESG topics, and that the Manager could demonstrate clear ESG based engagement outcomes. Importantly, there was clear evidence that ESG considerations were at the forefront of proxy voting decisions. The Manager had a well-structured approach to the collection and use of ESG specific data supported by a dedicated three person ESG team.

Overall, on a peer relative basis, Lonsec considers the overall level of ESG integration within this fund to be ‘High’.”

Commenting on the strong long-term performance record, Lonsec notes: “The Fund has delivered a three-year total return of 11.4% p.a. (all figures net of fees) to 31 December 2019. Relative to the reference index consisting of 50% A-REIT /40% Utilities /10% Infrastructure, the Fund out-performed by +3.17% p.a. over this period. Over the same period, the Fund outperformed the Lonsec peer group median by 1.4% p.a. For calendar year 2019, the Fund achieved a net total return of 21.85% outperforming the reference index by +3.75% (both figures net of fees). The income component of the gross return was 5.8%, in excess of the Fund’s objective of 120% of the yield of the Benchmark (approx 4.3%).”

Ashton Reid, Portfolio Manager, Legg Mason Martin Currie Real Income Fund said: “With record low bond yields and heightened equity market volatility, these are challenging times for investors looking for stable and growing income streams. In this environment, we believe that ‘Real Assets’ remain the tangible building blocks of the economy that are used every day (even in a recession) and can offer compelling lower-risk income exposure.  Loner-term growth continues to be underpinned by the strong population and urbanisation rather than being directly dependent on the business cycle.”

Andy Sowerby, Head of Australia for Legg Mason concluded: “The Legg Mason Martin Currie Real Income Fund is an innovative, differentiated and proven investment strategy with a track record dating back almost a decade. It has been designed to provide an attractive income stream that grows over time and this has never been more needed than today. We are delighted that Lonsec has recognised this Fund with their highest possible rating of ‘Highly Recommended’.”

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Ashton Reid

For investors who are focused on income, real income continues to provide an attractive yield and income growth from defensive assets which benefit from population growth, employment growth and infrastructure spending in the Australian domestic economy.

The return of market volatility, along with continued uncertainty regarding the status of cash refunds on franking credits, is sending a strong signal to income-oriented investors to consider weighting their portfolios more heavily towards real assets, says BetaShares Legg Mason Real Income Fund (managed fund) (ASX: RINC) Portfolio Manager, Ashton Reid.

“We saw bond yields rise in early 2018 in response to strong global economic growth and higher inflation expectations that caused central banks, especially the US Federal Reserve, to start to tighten monetary policy and unwind quantitative easing policies, with the top in yields around June.”

“But as the year progressed, signs of moderation in US growth, and heightened risks, including US-China trade tensions, Brexit uncertainty and geopolitical tensions, fueled investor uncertainty. This caused bond yields to fall again, a situation acknowledged by the US Federal Reserve’s decision to signal the cancelling of any more interest rate rises this year.”

“In this environment, investors are understandably looking for more stable equity investment options – and real assets (companies that own hard physical assets such as property, utilities and infrastructure) can help provide a defensive shield.”

Reid says these companies typically have strong market positions and growing demand driven by population growth, giving them the capacity to raise prices, in some cases above the inflation rate, regardless of the business cycle.

“These companies form part of everyday life and often are monopolistic in nature. Their demand profile is therefore relatively inelastic and not pegged to the business cycle, and consequently these companies have more predictable free cash flows and dividends,” he says.

Since its launch in February 2018, the Betashares Legg Mason Real Income Fund (managed fund) (ASX: RINC) has experienced steady demand from investors seeking out a defensive, income-focused equity fund providing investors with a combination of solid income and a lower volatility target in difficult market conditions.

RINC’s total return since inception^[1] (net of fees) has been a strong 18.25%.  The Fund is currently forecast to provide a dividend yield of 5.5% (excluding any franking credits) over the next 12 months on a forward-looking basis^[2]. RINC is “Recommended” by Lonsec and Zenith^[3].

“We believe the outlook for RINC is positive as key drivers of the income stream will continue to be population growth and the pricing ability of the businesses held.”

Current top holdings include Transurban Group, Stockland, Vicinity Centres and AGL Energy. Other stock holdings that significantly contributed to the recent performance of the Fund include a number of New Zealand energy companies such as Meridian Energy (GNE), Contact Energy (CEN) Genesis Energy (GNE) and Mercury New Zealand (MCY). Other good performers were Charter Hall Group (CHC) and APA Group (APA) while Stockland (SGP), Aveo Group (AOG) and  Unibail Rodamco Westfield (URW) were notable detractors^[4].

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Andy Sowerby

Legg Mason, a global multi-affiliate investment manager, today announced that the Legg Mason Martin Currie Real Income Fund has now over $500 million in funds under management.

Legg Mason Managing Director, Australia and New Zealand, Andy Sowerby said: “Launched in late 2010 the Legg Mason Martin Currie Real Income Fund is an investment strategy designed to deliver a high level of sustainable income with a target to grow the income ahead of the rate of inflation.

“As with any new approach, the market took time to understand the strategy but with over six years of proven returns the Fund has become increasingly popular with financial advisers and other investors.”

The Fund aims to provide an income that is at least 20% higher that the S&P ASX 200 index and grow this income stream in excess of the rate of inflation (as measured by the Consumer Price Index). It invests across Australian REITs, utility, infrastructure and like securities that are listed on the Australian Stock Exchange.

Sowerby added: “In a low growth, low interest rate world, for the income investor, listed real assets are the missing link between equities and fixed income. This asset class is ideally structured to provide a long-term income stream with similar characteristics to a fixed income security plus have the potential for capital growth, but with lower overall risk than a traditional equity strategy.”

Ashton Reid, Portfolio Manager added: “The benefit of real assets in any portfolio is their ability to provide natural inflation protection, so income is expected to go up, not down over time. While A-REITs undoubtedly have an important role to play within a real asset strategy, in designing this fund we felt that constraining an income investor’s exposure to only this segment would introduce unnecessary levels of concentration risk. We therefore expanded our universe to include other listed real assets including infrastructure and utilities which has added significant value to our approach.”

“Real assets generally have a large ‘sunken’ capital base that drives future cash flow. This means that growth does not necessarily rely on further investment expenditure rather it is about harvesting the income from previous investment. For real assets, returns are less likely to be swayed by the ups and downs of the business cycle, resulting in significantly more stable dividends for investors.”

Reid also noted: “Our research is focussed on uncovering those investments with the clearest visibility on future cashflows, and avoiding the riskier assets, and through careful stock selection and robust portfolio construction we have delivered better capital protection than the broader equity market over time.”

The fund has received independent research ratings – ‘Recommended’ – by Lonsec and Zenith.

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