The ACS Equity – Infrastructure and ACS Property – Global sectors might be two sectors investors choose to avoid, considering their long-term track record of underperforming funds with above-average volatility.
Money Management analysed the performances of each sector over a five-year period to determine which sector had the highest percentage of undesirable funds.
The two-Crown average Australian infrastructure equities sector holds the highest percentage of funds underperforming at an above-average volatility, with a whopping 66.7 per cent missing the metrics.
Director at Real Asset Management, Michael Frearson, said while the long-term earnings characteristics from infrastructure assets could be attractive for investors, domestically, we struggled with valuation and ease of access to unlisted infrastructure deals, causing an underperforming sector.
“Given the global chase for yield and low levels of domestic interest rates, we have seen asset prices move to fully valued, where it is not clear investors are adequately compensated for liquidity and operating risks,” he said.
Frearson said an area that could be further developed was the potential for the Government to issue infrastructure bonds for key projects, which would enable greater retail investor participation in this asset class.
“The long-term nature and inflation protection within the bonds can be attractive to long-term investors, particularly when coupled with government credit risks on capital while retaining some level of operating risks.”
He noted this was already happening in the UK, as the Government was actively developing an infrastructure bond market for pension funds and direct investors.
Only one of 27 funds managed to outperform the index and maintain low volatility, the Mercer Global Unlisted Infrastructure Fund.
The fund, which is rated five Crowns and has an FE risk score of 49 (where below 100 is ideal), returned 13.81 per cent annually over three years as opposed to the benchmark of 6.68 per cent, while volatility remained 1.11 per cent lower than the index.
The fund invests in infrastructure equity investments using a multi-manager approach and has exposure to overseas investments that are fully hedged to Australian dollars.
The chart below shows the performance of the Mercer fund over three years relative to the infrastructure sector.
The two-Crown average global property sector held the second highest percentage of funds underperforming in a more volatile environment, with 55.6 per cent of funds failing to hit targets.
Two of 39 funds in the sector managed to outperform the sector in low volatility: the APN Asian REIT Fund and the AMP Capital Core Property Fund.
The APN Asian REIT Fund produced cumulative returns over five years of 58.13 per cent at a volatility of 8.94 per cent, while the AMP Capital Core Property Fund returned 49.4 per cent at a volatility of 5.62 per cent.
The chart below shows the performance of the funds over three years relative to the sector average.
