Geared behaviour magnifies AREIT returns
Australian Unity’s Property Securities Growth Units fund has delivered three-year average annual returns around 10 percentage points above its listed property fund competitors thanks to its split trust structure that sees the fund behave like a geared fund.
The fund returned 26.26 per cent for the three years to May 2017 and was followed by Freehold AREITs and Listed Infrastructure Fund (16.82 per cent), Optimix Wholesale Property Securities Trust B (16.71 per cent), Resolution Core Plus Property Securities A (16.65 per cent), and Folkestone Maxim AREIT Securities (16.61 per cent).
While the fund performed better than its competitors, the fund lost 76 per cent of its return during the global financial crisis (GFC).
The 30-year-old closed fund mostly invests in listed Australian real estate investment trusts (AREITs) with less than 25 per cent in unlisted property securities.
Australian Unity portfolio manager, Alex Fisher, said the listed market performed very well from 2011 to 2012 until it hit its peak from around July to August 2016.
“It’s been a bit more choppy over the last 10 to 11 months. The market got a bit expensive and fell back a bit and got a bit cheap and moved up. Our listed exposure has done a bit better than the overall market,” Fisher said.
The Australian Unity Property Securities fund consists of three different classes of units – ordinary, growth, and income – with the income and growth units operating under a split trust structure. Under the split trust structure, the income and growth units share a combined underlying portfolio. While there was no gearing inside the fund itself the split structure allowed for the income units to give capital gains or losses to the growth units.
“It does that in exchange for sending income the other way. So, it behaves like it is geared but it’s not actually geared. You end up with a scaling up of capital gains or capital losses when the market rises or falls a lot as it has from 2012 to late 2016,” Fisher said.
“The structure of the fund means in an upmarket I would be very surprised if this particular class of units were anything other than number one on the list. In a down market it would probably be dead last.”
Fisher said the fund’s exposure to the Australian Unity Office Fund, a relatively small listed Australian REIT fund, returned 16 to 17 per cent since listing last year and had supported the returns of the fund.
“The other investment that went gang busters in the past 12 months has been in unlisted property invested in Australian Unity’s Listed Retail Property fund which returned around 33 per cent in FY17, and over the past three years it’s done just under 20 per cent per annum,” he said.
“And we have our Westfield, Scentre, and Stockland but they’re not really the key part of the story.”
However, for the rest of the top five listed property funds, Westfield, Scentre, Stockland, Mirvac Group, Vicinity Centres, and Dexus Property Group were the main stock holdings. The cluster of the funds around the 59.5 per cent to 58.44 per cent range in cumulative returns for the three years to 31 May 2017 has reflected this.
For second place, Freehold, while its three-year returns were just above its competitors, the fund’s one-year returns were the lowest out of the top five at 4.15 per cent.
Freehold managing director, Grant Atchison, said the fall in returns were due to the fund’s infrastructure stocks that took a hit.
“The fund is around 70 per cent REIT and 30 per cent infrastructure. The rising bond yields in August/September last year hit infrastructure stocks more than they did REIT stocks, in fact considerably more,” Atchison said.
“With our exposure to the infrastructure universe, that’s primarily why we underperformed during that period.”
Atchison said the fund had underweighted the infrastructure part of the portfolio due to this environment.
“Both REITs and infrastructure have direct correlation with bond yields and domestic bond yields are very highly correlated with the US and we’re seeing a potential environment in rising rates,” he said.
“We’ve moved the portfolio to be more underweight infrastructure than what we’ve traditionally carried; again, there’s a point in time in which that despite not liking any individual stock they look cheap and we’re looking to participate in it. But the overall theme is that those infrastructure headwinds have been playing out.”
The funds chosen for this top five list was based on the fund’s three-year cumulative performance.
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