Fund manager Bennelong Australian Equity Partners is best known as an investor in growth stocks that tends to avoid safe blue chips, infrastructure stocks and utilities. But in a surprising move the Bennelong Australian Equities Fund has built up a significant exposure to real estate investment trusts.
Since June last year it has built up its holdings in REITs to a fund weighting of 10.7 per cent, which is more than the benchmark exposure of 7.9 per cent of the S&P/ASX 300 Accumulation Index.
Its focus is on the industrial and office sectors and its largest position is Goodman Group, a global property developer, asset manager and owner of industrial warehouses.
“It [Goodman] is strategically focused on properties located in built-up metro in-fill areas pf major capital cities, and in supporting clients like Amazon and Alibaba in their increasingly critical supply chains,” Bennelong says in its latest quarterly report.
Bennelong likes what it calls the company’s “earnings visibility”, with a development pipeline worth around $10 billion, including $4 billion of current work in progress. Earnings growth is in the high single digits and gearing is low.
So now the fund has a warehouse operator as one of its big holdings, sitting alongside its investments in CSL, Aristocrat Leisure, Costa Group and Domino’s Pizza.
Goodman Group has other fans. Macquarie Securities rates it an ‘outperform’ in its latest review of the REIT sector. Macquarie’s other ‘outperform’ recommendations include API Industria REIT, Charter Hall Group, Lendlease and Mirvac Group.
Bennelong was highly exposed to the sell-off on the ASX in the December quarter but things have picked up in the March quarter. The Australian Equities Fund was up 10.6 per cent during the three months to the end of March, compared with the 10.9 per cent benchmark increase over the same period.
Over the past 12 months the fund has returned 11.1 per cent, compared with 11.7 per cent or the index.
Bennelong says: “We observe that investors are still very much attracted to what is perceived as safe. This is seen in the recent outperformance of bonds, gold, REITs, infrastructure and comfort stocks like Woolworths that are now trading expensive.
“Investors are, however, incrementally paying more attention to fundamental drivers like earnings and growth. Importantly for the fund, this will be supportive of returns.”
Bennelong says investors’ concern is about the prospect for earnings growth. “Based on consensus numbers, earnings are expected to grow just over 5 per cent over the next 12 months. In our view there is significant earnings risk right across the market. Earnings projections are optimistic.”
As a result, Bennelong invests in what it calls high quality companies with low risk, predictable and generally defensive businesses, including REITs with low gearing.