Australian listed real estate investment trusts (A-REITs) are often included in well-constructed investment portfolios for both their predictable dividends and diversification benefits. While A-REITs help provide exposure to property assets that can otherwise be difficult for the average investor to access, the A-REIT Index does pose a number of challenges for investors.
The A-REIT sector is not well diversified, with only a small number of stocks, and is dominated by a few large companies.
To help overcome these issues and improve potential return outcomes, A-REIT investors should consider investing in a real asset fund which offers a broader investment universe, encompassing not only A-REITs but also listed infrastructure and utilities which carry similar characteristics … think ‘Property Plus’.
As an example of diversification, the BetaShares Legg Mason Real Income Fund (ASX:RINC) invests in a portfolio of listed companies that own ‘hard’ physical assets, like property, utilities and infrastructure. Assets include A-REITs, airports, toll roads, and electricity and gas grids.
Some of the key features of real assets include:
- Such companies are often monopolistic in nature and have the potential to deliver strong dividend income from reliable revenue streams (underpinned by long term contracts and favourable regulatory structures), whilst also growing that income ahead of inflation.
- Many real assets, by their nature, have inflation protection built into their pricing. That’s because they are often government regulated and party to long term contracts that allow them to increase their prices, tolls or rates in-line with (or sometimes above) the inflation rate. Investing in real assets can enable investors to notionally hedge against future price rises.
- Real asset companies have also demonstrated a low correlation to the business cycle as their revenues tend to hold up well when growth weakens as people still need to heat their homes, drive on toll roads and use water, gas and electricity. This more stable and predictable revenue can lead to more stable returns for investors.
Compared to owning just A-REITs, funds like RINC offer several advantages:
- Lower concentration risk. RINC’s investment universe is more diversified, so it avoids the concentration issues associated with the A-REIT Index. The current portfolio is 55 per cent A-REITs, 32 per cent utilities and 12 per cent infrastructure.
- Lower single stock concentration. RINC is actively managed and seeks to deliver high, sustainable and growing income, so the portfolio managers focus on building a diversified portfolio that is not over-exposed to any one company or thematic. For example, Scentre Group has a 18 per cent weight in the A-REIT Index but its exposure in RINC is only 6 per cent. RINC has a 9 per cent maximum stock limit ensuring that it constantly remains well diversified across individual stocks (see table following) and real asset sub-sectors. The top 10 stocks in the A-REIT Index make up 86 per cent of the index, while the top 10 stocks in RINC make up 53 per cent of the portfolio.
Ashton Reid is a portfolio manager at Martin Currie Australia