Real estate investments a winner for retirement income

A portfolio of listed companies that own ‘hard’ physical assets rewarded investors in the Legg Mason Martin Currie Real Income Class A Units Fund over the last year, with its continued strong performance also seeing it crowned winner in the Money Management Fund Manager of the Year awards Retirement and Income category.

The companies the fund invests in hold assets such as property, utilities and infrastructure, which Martin Currie Australia portfolio manager, Ashton Reid, cited as key to its resilience and strong performance in 2018.

“Real asset companies such as shopping centres, ports, toll roads, electricity and gas grids, and airports are an integral part of everyday life and are often monopolistic in nature,” he said.

“Their demand profile is therefore relatively inelastic and not pegged to the business cycle, hence these companies have more predictable free cash flow and dividends.

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“Due to their strong market positions, and the growing demand driven by Australia’s population growth, real asset companies have the ability to raise prices, in some cases above inflation, irrespective of the business cycle.”

Put simply, real assets can generally protect future income from inflation. As relatively defensive assets they offer protection in periods of market downturn, such as the unexpected slump last December, helping explain the Legg Mason Martin Currie offering’s success.

On the suitability of these assets to retirement and income investors, Reid pointed to the low volatility of the income provided, as that’s what helps maintain retirees’ lifestyles.

“Real assets have two important features that help them deliver a steady, low volatility income stream,” he said, pointing to their low correlation to the business cycle and dividend stability.

“So even if the share prices of real asset companies fall in response to macro-economic events or shifts in share market sentiment, the income generated by these companies is likely to remain stable. And this is what matters most to income investors.”

The Pendal Monthly Income Plus Fund, a finalist in this category, took a more diverse approach to its investments, with its combination of Australian equities, interest rates and credit allocations all driving strong performance.

Pendal portfolio manager, Peter Farac, said the investment in interest rates were most advantageous over the last year, while equity markets struggled.

Annuities, in contrast, are a more traditional approach to retirement income, with finalist Challenger’s products seeking to provide stable lifetime income.