Peter Green

Lonsec has released new analysis of Australian equity market performance over the 2025 calendar year, highlighting a challenging period for growth strategies, strong dispersion among active managers, and renewed momentum in the small‑cap sector. The findings also point to meaningful structural shifts driven by superannuation fund flows and the continued rise of passive investing.

Growth underperforms as markets rotate

Lonsec’s review shows that growth strategies lagged throughout CY25 as investors rotated away from structural growth and toward resources and value-oriented stocks.

“We saw a clear shift in market leadership this year,” said Peter Green, Director of Research at Lonsec.

“Technology and healthcare sectors contracted –19.1% and –23.9%, while resources and materials delivered impressive gains of +36.2% and +37.5%. This rotation significantly impacted growth managers’ relative performance.”

Small caps enjoy a strong recovery

After several muted years, small caps delivered excellent returns, with the S&P/ASX Small Ordinaries Index rising 24.96%.

“Small caps finally had their day in the sun,” Green said. “Gold miners were a standout, buoyed by a 65% increase in the spot gold price.

Reporting season drives investor behaviour

Lonsec notes heightened volatility around the February 2025 and August 2025 reporting periods.

“We observed large price reactions when company results differed from expectations,” said Green.

“Managers have been more active leading into reporting season as earnings guidance becomes an increasingly important driver of performance.”

Structural market shifts continue to evolve

The research also highlights long‑term structural changes influencing market dynamics:

• Top industry super funds account for around 12% of capital in the domestic equity market (based on 25% of member balances allocated to Australian shares).
• Passive investing continues to accelerate, shaping index composition and liquidity.
• IPO activity remained subdued, though Lonsec expects more listings in 2026 as market conditions improve.

“These structural forces are reshaping the Australian equity landscape,” Green said.

“They affect everything from liquidity to price discovery and create both headwinds and opportunities for active managers.”

While outperformance is unlikely to stay such a high level for a sustained period of time, market conditions do now favour value managers.

After a decade of low inflation, anaemic wages growth and falling bond yields, the perceived wisdom of markets had been that value stocks will continue to underperform compared to growth stocks.  However, the latest data from research house Lonsec supports the view that value stocks are back in favour with investors and a value rotation is well underway.

As part of its most recent Australian equities sector review, Lonsec found that in the 12 months to 31 December 2021, 61% of value funds outperformed the S&P/ASX 300 TR Index, up from a mere 5% over the five years to the end of December 2021. This tilt towards value funds is most stark for the rolling year to 28 February 2022, which saw 91% of value funds outperform versus only 46% of Growth funds.

Lonsec Director of Research, Peter Green, said “We have seen a growing shift in the market over the past 12 months, but this has really picked up in the last three months with outperformance jumping from 61% to 91% of Value funds. While outperformance is unlikely to stay such a high level for a sustained period of time, market conditions do now favour value managers”.

The key drivers of this value rotation are the spectre of rising interest rates and a belief from investors that inflation is gaining momentum as the COVID economic recovery takes shape in an environment still impacted by supply chain disruption, tight labour markets and still loose monetary policy. Investors have increasingly been pricing in this eventuality, bidding down long earnings duration assets whose valuations are more interest rate sensitive and rotating into ‘value’ stocks like diversified miners and financials likely to benefit more from the macro environment.

The Australian ETF market is now worth $122bn with over 200 different ETFs listed on the ASX.  Lonsec Research expects this to continue to grow into the immediate future.

Lonsec Research has been covering the ETF market since its inception and in the past year has noticed the rise of thematic ETFs, built around consumer demand for themes such as ESG or climate focussed and technology related themes such as blockchain, cloud computing and semiconductors. Lonsec Research Director of Research, Peter Green, explains “ETF Managers have teamed up with Index providers to develop new indices to cater to the Australian market for more niche or thematic ETFS. For example ETF Securities teamed up with Solactive to create the ETFS Semiconductor ETF which provides exposure to the top, global semiconductor companies. Further, this is a strong thematic sector that Active Fund Managers are capitalising on too.”

These new types of ETFs are growing in popularity, especially among younger investors who are used to market disruptors, interested in the thematics and more likely to be comfortable with the digital trading platforms that make ETFS easy to access. Lonsec Research notes there were 22 new ETFs launched on the ASX over the last 12 months, 13 of which were thematic based ETFs.

For those wanting to invest in these newer ETFS, Peter Green advises that you do you research into both the ETF and the underlying index “Some of these thematic ETFS are much more concentrated than broad-based, global market ETFs. For instance, these thematic ETFs could hold 30 stocks and have heavy weighting to the top five. This means your investment is heavily reliant on these five stocks performing.” Concentration risk can also occur with some the of the more niche ETFs as there is a limited number of securities so they will appear in more than one index. If you hold multiple ETFs covering one of these themes, you may be inadvertently overexposed to one company or sector. Peter Green continues “It is really important that you understand the underlying index of any ETF, in terms of its concentration, rules and volatility and how this matches with your own risk tolerance.”

Peter Green has been appointed Sector Manager, Australian Equities, with responsibility for leading Lonsec’s coverage of Australian equity managed fund products. Mr Green will also retain his current position as Head of Listed Products, covering Lonsec’s ever-growing universe of exchange traded funds and other listed products.

Lonsec Research Executive Director Lorraine Robinson said Mr Green’s wealth of experience, including 12 years at Lonsec working across managed funds, listed products, and direct equities research, will put Lonsec in a strong position to manage growth.

“Peter is one of the most experienced and consummate research analysts in the Australian market, so we are very pleased that he will be moving into this expanded role,” said Ms Robinson.

“Peter will now have responsibility for leading our listed product research as well as our Australian equities manager research, allowing us to benefit from Peter’s knowledge and experience in this critical sector. Peter is highly respected among fund managers and has been instrumental in the development of our direct equities research capability, so this is a natural fit for him.

“We are seeing a steady uptick in new investment products entering the Lonsec rated universe, and Peter’s appointment, along with recent new hires, will help us accommodate this growth while maintaining the quality of our coverage and continuing to innovate our research offering.”

Lonsec has also appointed Chad Troja as Head of Direct Equities. Mr Troja has been a member of Lonsec’s direct equities team since 2017 and has over 15 years’ experience in equities research and funds management. Asha Rahman has joined Lonsec’s research team as an Associate Investment Analyst and Rish Chaudhuri will commence as an Investment Analyst in October.

Lonsec’s Australian Equities Sector Review, released this week, shows that income sector funds covered by Lonsec returned 1.6% after fees in 2015, below the S&P/ASX 200 Accumulation Index return of 2.6%.

While the income strategy has tended to outperform over longer periods of time, there will be periods in which it fails to match market returns. According to Peter Green, General Manager of Equities at Lonsec Research, recent underperformance should serve to remind income investors to remain focused on fundamentals.

“We have been quite critical of what has started to become an unquestioning belief in the ability of income investing to deliver superior returns year on year,” said Mr Green. “What our research shows is that the income approach is not infallible. If investors take their eye off the fundamentals, returns can suffer as businesses are forced to unwind their dividend strategies. This can have a real impact on portfolios, especially those with larger weightings in the top 20 shares.”

Lonsec’s peer analysis shows that 13 out of 30 income funds covered by Lonsec failed to achieve a positive return in 2015, with returns ranging between 11.4% and -6.5%. On average, the income sector underperformed by -1.0% in 2015, and by -0.8% on a three-year basis. Although income has outperformed over five years, it has been by a modest 0.7%, although funds have continued to meet their income targets.
Lonsec Australian equity income fund performance (after fees) to end of 2015

Growth funds deliver higher returns for lower risk

The 2015 year proved to be one of real dispersion between value and growth Australian equities funds. Lonsec’s growth sector provided a return of 9.3% on average (after fees) in 2015, compared to an average return of only 1.8% for Lonsec’s value peer group, which underperformed the S&P/ASX 200 Accumulation Index return of 2.6%.
According to Lonsec, Australian growth-styled equity fund managers are benefiting from high levels of earnings growth in emerging sectors, with many outperforming the benchmark despite lacklustre performance from the broader equities market.

“There was a real turning point in 2015 as growth funds overtook value funds in terms of performance,” said Mr Green. “While returns have varied across funds, growth managers generally have been able to take advantage of significant earnings expansion in key sectors, which has provided investors with some much-desired growth in their returns.”

Lonsec upgraded five growth funds in 2015, indicating that while returns have certainly been favourable, fund managers have also worked to improve processes and manage risk more effectively. This is especially important as volatility continues to be a major issue for investors, and fund discipline is likely to be tested further.
Heightened volatility has been associated with recent price index declines, including most notably at the top end, with ASX 20 shares losing -1.4% in 2015.

“Once again, we’ve seen more divergence in resources and energy versus current growth from industrials,” said Mr Green. “Recent large falls among some top 20 shares have tripped up many fund managers, and funds that have been overweight financials are now starting to struggle.”

However, Mr Green said that growth funds may continue to be favoured by investors looking for a way out of the global low-growth maze.

“Growth managers may continue to benefit from earnings expansion in key industrials, as well as shares that benefit from exposure to the US recovery or Chinese consumers,” he said.
Mr Green stressed that as the market continues to experience heightened volatility, fund managers will face a real test of discipline and process.

“Success in 2016 will depend on the ability of fund managers to stick cleanly to their objectives and ensure that the focus remains on long-term performance and sustainable returns,” he said. “Lonsec will continue to watch the Australian equities sector very carefully to help ensure that we have the best possible idea of how funds are performing.”

The latest analysis by research house Lonsec found a significant growth in the number of investments catering to direct investors during the past year.

“Given the average self-managed super fund has almost a third of its assets invested in Australian shares, it’s logical there should be a strong increase in the type of products aimed at these investors,” Lonsec senior investment analyst Peter Green said.

“This surge of interest has seen a sustained rise in new Listed Investment Companies, Exchange Traded Funds and Separately Manage Accounts, primarily driven by greater demand from direct investors,” Mr Green said. Lonsec has also provided ratings for 26 new Australian equities products in the past 12-18 months.

In particular, there has been a number of initial public offers for LICs, which reverses the recent trend within the sector. LICs had experienced a long period of little, if any, new offers as most companies have traded on the market at a discount to net asset value in the period following the global financial crisis.

However, strong returns from the Australian market and renewed interest in direct investing has seen LICs regain their trading premium and popularity, leading to a new round of IPOs, Mr Green said.

“Lonsec Research has recently been involved in substantial research of this sector, including the select rating of three new LICs (QV Equities, Perpetual Equity Investment Company and the soon to be listed Wealth Defender Equities). We expect several more niche offerings in the next 12 months while the IPO window remains open,” Mr Green said.

Exchange Traded Funds have experienced rapid expansion in Australian in recent years with more than $16 billion in funds under management.

“We are seeing strong product innovation in this area and we expect Australia to follow the US trend with even further growth and expansion ahead,’’ Mr Green said.

Separately Managed Accounts are also one of the fastest growing direct investment products. They allow investors, and their financial advisers, to invest directly in a portfolio of shares but with less administration compared with individually owned shares.

“SMAs have been gradually increasing in popularity in Australia during the past decade, however they have a long track record in the US market,’’ Mr Green said.

“They are basically the next evolution of trading platform, which share some of the benefits of a master trust yet allow investors to by-pass the managed fund structure and own the portfolio directly in their own name,’’ he said.

Pros and Cons

Listed Investment Companies

Strengths

• enhanced corporate governance due to separate board and need to meet ASX-listing rules
• greater discretion of directors to manage dividend payments among other capital management initiatives
• stable capital structure
• ease of access via ASX

Weaknesses

• potential to trade below net asset value of underlying portfolio
• can be locked in to long term management agreements
• smaller LICs may have liquidity concerns

Exchange Traded Funds

Strengths

• simple strategy and good transparency of portfolio holdings
• lower management fees then managed funds
• product designed to trade at or near net asset values
• ease of access via ASX

Weaknesses

• “market making” is complex
• can include some overly exotic products
• bid/ask price spreads can be volatile and vary between products

Separately Managed Accounts

Strengths

• usually provide greater tax efficiencies compared with managed funds
• individual investor own their underlying portfolio
• full transparency of underlying investments and performance
• more direct dividend distributions compared with managed funds or ETFs

Weaknesses

• can only be accessed ‘on platform’
• a number of new managers may carry additional business risk
• increased “execution” risk
• tend to be lower turnover and more concentration in fewer stocks

The latest review of Australian equities by research house and ratings company Lonsec has found its actively managed funds have clearly outperformed index funds in all recent major time frames.

According to its Australian Equities Sector Review, Lonsec found the 137 active managed funds it provides investment ratings for have outperformed their corresponding index by an average of 1.54 per cent on an after fee basis during the past three years but also across other significant comparison periods.

“The findings are very topical given the ongoing debate about the ability of active funds to outperform passive or index funds,’’ Lonsec senior investment analyst Peter Green said.

“The results from the active managers within our peer group clearly shows the benefit of careful selection of fund managers,” Mr Green said.

“The case for supporting active management is evident across most time frames and these results highlight that it can be worthwhile paying for active professional large cap stock pickers,’’ he said.

Lonsec remains agnostic in the wider debate about active versus passive funds and lets the results stand on their own merit; however, it does have a view as to what constitutes a ‘highly recommended’ active manager.

“In a crowded market place, the difficulty is how to sort the good from the mediocre. For our research and ratings purposes we have carefully investigated what it takes to stand out from the pack,” Mr Green said.

Lonsec’s approach to assessing fund managers may also prove a useful check list for all investors, which we briefly summarise as follows:

1. The Firm: Is the organisation financially stable and viable? What is the ownership and staff culture, is there good quality stewardship and a culture of excellence?
2. The People: Are the key investors experienced, talented and passionate? Do they have the courage to have a different view and not just follow the herd and, importantly, do they have the humility to correct a mistake?
3. The Philosophy: Does the firm have a clear and well-articulated investment philosophy about how it will add value? Is the team aligned to this philosophy?
4. The Process: Does the firm’s investment process give it a competitive research advantage that helps it meet its investment objectives? Is this process repeatable over an investment cycle? Are there are any constraints to this process?
5. The Portfolio: Are historical portfolio holdings and characteristics in line with the manager’s philosophy and process? Is risk managed effectively?
6. The Performance: Is there a logical reason for historical performance, i.e. does it match with the firm’s approach? Are the drivers of returns sustainable over the long term?

The case for passive management

• Lower costs: full replication index funds tend to be much cheaper which can help them provide more efficient exposure to market indices.
• Transparency: index funds provide investors with a high degree of transparency of the underlying investments. This contrasts with active managers who tend to be more opaque with their stock holdings, as often they believe this information is intellectual property.
• Greater certainty of outcome: many passive managers have been successful in achieving their investment objectives of closely matching an index, regardless of market conditions. This contrasts with many active funds which tend to experience underperformance from year to year, even if they have a successful track record of meeting long term objectives.
• Tax efficiency: Index funds tend to have low turnover within their portfolios which can lead to greater tax efficiency and reduce trading costs.

The case for active management

• Professional management: professional managers tend to have superior investing skills.
• Less concentration risk: The highly concentrated Australian market can create unnecessary risk from certain highly represented companies and sectors. Active funds can better manage this risk.
• Flexibility: Active managers are better able to adapt to market conditions which can be critical during key market turning points.

Head to head

“The Australian equity market is significantly concentrated with almost two-thirds of the market allocated between resource and financial stocks. In addition the ‘top 50’ stocks also account for nearly 70 per cent of capitalisation of the S&P/ASX200 Acc Index, with the majority of this in the ‘top 20’ largest stocks,’’ Mr Green said.

“As a result, a majority of large cap stocks are heavily researched, meaning it is difficult for fund managers to get an information advantage over their peers“, Mr Green said.

“Fund managers who are not prepared to take meaningful under or over-weight positions against these top stocks, or who do not dig deeper for strategies outside the top stocks, will struggle to consistently outperform the market.”

Despite the strong performance by the Lonsec managers, generally active managers are under performing passive funds in Australia. According to the SPIVA Australia Scorecard the majority of large-cap equity funds again under performed the index during the 2014 calendar year and for the three and five year periods. Lonsec fund managers are clearly an exception.

]]> Lonsec Releases Aussie Equities Sector Review

The latest review of Australian equities by research house and ratings company Lonsec has found its actively managed funds have clearly outperformed index funds in all recent major time frames.

According to its Australian Equities Sector Review, Lonsec found the 137 active managed funds it provides investment ratings for have outperformed their corresponding index by an average of 1.54 per cent on an after fee basis during the past three years but also across other significant comparison periods.

“The findings are very topical given the ongoing debate about the ability of active funds to outperform passive or index funds,’’ Lonsec senior investment analyst Peter Green said.

“The results from the active managers within our peer group clearly shows the benefit of careful selection of fund managers,” Mr Green said.

“The case for supporting active management is evident across most time frames and these results highlight that it can be worthwhile paying for active professional large cap stock pickers,’’ he said.

Lonsec remains agnostic in the wider debate about active versus passive funds and lets the results stand on their own merit; however, it does have a view as to what constitutes a ‘highly recommended’ active manager.

“In a crowded market place, the difficulty is how to sort the good from the mediocre. For our research and ratings purposes we have carefully investigated what it takes to stand out from the pack,” Mr Green said.

Lonsec’s approach to assessing fund managers may also prove a useful check list for all investors, which we briefly summarise as follows:

1. The Firm: Is the organisation financially stable and viable? What is the ownership and staff culture, is there good quality stewardship and a culture of excellence?
2. The People: Are the key investors experienced, talented and passionate? Do they have the courage to have a different view and not just follow the herd and, importantly, do they have the humility to correct a mistake?
3. The Philosophy: Does the firm have a clear and well-articulated investment philosophy about how it will add value? Is the team aligned to this philosophy?
4. The Process: Does the firm’s investment process give it a competitive research advantage that helps it meet its investment objectives? Is this process repeatable over an investment cycle? Are there are any constraints to this process?
5. The Portfolio: Are historical portfolio holdings and characteristics in line with the manager’s philosophy and process? Is risk managed effectively?
6. The Performance: Is there a logical reason for historical performance, i.e. does it match with the firm’s approach? Are the drivers of returns sustainable over the long term?

The case for passive management

• Lower costs: full replication index funds tend to be much cheaper which can help them provide more efficient exposure to market indices.
• Transparency: index funds provide investors with a high degree of transparency of the underlying investments. This contrasts with active managers who tend to be more opaque with their stock holdings, as often they believe this information is intellectual property.
• Greater certainty of outcome: many passive managers have been successful in achieving their investment objectives of closely matching an index, regardless of market conditions. This contrasts with many active funds which tend to experience underperformance from year to year, even if they have a successful track record of meeting long term objectives.
• Tax efficiency: Index funds tend to have low turnover within their portfolios which can lead to greater tax efficiency and reduce trading costs.

The case for active management

• Professional management: professional managers tend to have superior investing skills.
• Less concentration risk: The highly concentrated Australian market can create unnecessary risk from certain highly represented companies and sectors. Active funds can better manage this risk.
• Flexibility: Active managers are better able to adapt to market conditions which can be critical during key market turning points.

Head to head

“The Australian equity market is significantly concentrated with almost two-thirds of the market allocated between resource and financial stocks. In addition the ‘top 50’ stocks also account for nearly 70 per cent of capitalisation of the S&P/ASX200 Acc Index, with the majority of this in the ‘top 20’ largest stocks,’’ Mr Green said.

“As a result, a majority of large cap stocks are heavily researched, meaning it is difficult for fund managers to get an information advantage over their peers“, Mr Green said.

“Fund managers who are not prepared to take meaningful under or over-weight positions against these top stocks, or who do not dig deeper for strategies outside the top stocks, will struggle to consistently outperform the market.”

Despite the strong performance by the Lonsec managers, generally active managers are under performing passive funds in Australia. According to the SPIVA Australia Scorecard the majority of large-cap equity funds again under performed the index during the 2014 calendar year and for the three and five year periods. Lonsec fund managers are clearly an exception.

The post Lonsec Active Funds outperform and the passive v active debate appeared first on AdviserVoice.

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%.

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.