Managed fund researcher Morningstar has given the BlackRock Indexed Australian Listed Property fund a ‘gold’ rating, based on its well executed passive strategy and its low cost.
Morningstar says the Australian listed real estate investment trust (REIT) market is well suited to a passive (or indexed) approach because it high level of concentration makes it hard for an active manager to outperform.
The Australian real estate investment trust market has become highly concentrated since the financial crisis, when a number of overly indebted REITs got into trouble.
The A-REIT market is also top-heavy, with 10 REITs making up about 90 per cent of the index. And just two REITs – Scentre Group and Westfield Corp -account for 30 per cent.
“A low-cost indexed approach works well in such a concentrated market and this is what the BlackRock fund offers. It aims to replicate the S&P/ASX 300 A-REIT Index, a benchmark that is made up of about 30 REITs,” Morningstar says.
“For a first class real estate strategy that continues to deliver, look no further than the BlackRock Indexed Australian Listed Property fund,” it says.
The BlackRock fund has been in the top quartile over three, five and 10-year periods. It has produced an average return of 15.3 per cent a year over the three years to the end of May and 16 per cent a year over the past five years.
Its management fee is 20 basis points.
While Morningstar believes a passive style is the best approach in the A-REIT market, it also cautions: “It is important to note that a passive fund has no scope to dampen risk, compared with the benchmark. In this current period of the cycle, REIT valuations are arguably inflated and passive funds won’t protect investors from the impact of a correction.
“Nevertheless, we believe a well executed passive approach remains particularly appealing in this concentrated market. Add the unmatched fee and this strategy is one of our top picks for the sector.”
In addition to Scentre and Westfield, REITs in the portfolio include Goodman Group, Stockland Corp, Dexus, GPT Group, Vicinity Centres, Mirvac Group, Investa Office Fund and Charter Hall Group.
A number of REITs got into trouble during the financial crisis because of the amount of debt they had taken on.
REITs are more conservatively managed than they were prior to the financial crisis. Many have de-leveraged, sold non-core assets and reduced the proportion of offshore income.
However, Morningstar says there are danger signs: “Growth in earnings per share has been propelled by the falling cost of debt and price appreciation has compressed yields. The sector could be threatened by rising interest rates, economic slowdown or competition.”
BlackRock is the largest asset manager in the world, with US$5 trillion under management. In addition to its ratings of the fund, Morningstar raised the parent company’s rating from neutral to positive.