Morningstar has issued a rating update for the iShares Australian Listed Property Index fund, giving the fund a ‘gold’ rating largely as a result of its “compellingly low cost” and superior indexing capabilities
The Australian listed property trust (A-REIT) sector was a top performing asset class last financial year, returning more than 19 per cent.
Morningstar points out that it is a very concentrated sector, with just 28 stocks in the S&P/ASX 300 A-REIT Index. It says this gives active managers very little scope to out-perform and, as a result, it favours investing in the sector via an index fund.
“The A-REIT sector remains a narrow space for investing. The top 10 names make up in excess of 85 per cent of the index,” Morningstar says.
“If anything, the benchmark is becoming narrower, with 2018 seeing major consolidation and stock exits due to corporate activity.”
Westfield was taken over the French company Unibail Rodamco, A Hong Kong company ESR acquired Property Link and Oxford Properties Group acquired Investa Office Fund.
“In this concentrated sector, we’ve seen active managers struggle to deliver alpha on an after-fee basis.
“Therefore, cheap, reliable passive strategies have generally been out preferred option in this space. iShares’ time-tested indexing capabilities and low 20 basis point fee have kept it ahead of most active rivals.”
Morningstar says it is important for investors to recognise that a passive fund has no scope to “damp risk versus the benchmark” and a significant corporate action could cause major portfolio shifts.
As to the sector generally, it says the strong performance over the past year means valuations are stretched.
“REITs are arguably more conservatively managed than they were prior to the global financial crisis. Many have deleveraged, sold non-core assets and shrunk the proportion of offshore income.
“But it is still worth looking out for warning signs. Earnings per share growth has been propelled by falling cost of debt and price appreciation has compressed REIT yields. The sector thus could be threatened by rising interest rates.”