Michael Doble
Investors using indexing for property trust investing could be exposed to more risk, a property fund manager has warned.
APN Funds Management deputy chief investment officer Michael Doble said index investing could no longer be relied on for traditional income generating strategies or reducing risk.
Doble said property investors must demand greater scrutiny of index investment strategies, which often contain an “over-exposure to growth oriented trusts reliant on corporate earnings [for income distributions] rather than traditional rent collecting”.
Doble blamed a high exposure to corporate earnings for the “second shockwave to hit AREITs [Australian real estate investment trusts] following the first leverage-inspired shockwave”.
“Income-centric investors need to understand that the shift from income collecting towards higher corporate earnings among some trusts has changed the risk and return profile of part of the AREIT index,” he said.
“Some REITs are seeking to generate earnings from such areas as property development and hotels, which can be easily affected by tourism downturns.”
Doble argues the traditional property fund manager model of buying a building, collecting rents and enjoying capital appreciation on the investment is still the best strategy.
“We are seeing a few fund managers coming round to our way of thinking,” he said.
“Exposure to corporate earnings is fine if you are investing for growth and prepared to take on the extra risk and uncertainty,” he said.
“If you are investing for reliable income then trusts with a high exposure to corporate earnings should be questioned.”
Doble also highlighted the limited diversification of index investing, noting that the AREIT index is dominated by stocks such as Westfield, which in itself accounts for about 40 per cent of the index, with the top five trusts accounting for 72 per cent of the index.
Doble said the underlying property fundamentals are “still yet to justify the market’s dramatic sell-down”.
