Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Is it time to buy into the unloved Australian property sector?
As Coronavirus cases drop, and talk of CSL’s potential gigs to manufacture a vaccine (AstraZeneca’s and/or University of Queensland’s candidates, if they are successful) starts doing the rounds, it hopefully shouldn’t be too much longer before second-wave lockdown restrictions ease and the economy is back on track. That is the plan, notwithstanding any unforeseen outbreak.
It pays then to look at some of the unloved sectors that fell victim to the pandemic. One such sector was property. Both residential and commercial property markets were sold off during the pandemic. The S&P/ASX 200 Real Estate Index (XRE) comprises stocks included in the S&P/ASX 200 that are classified as members of the GICS real estate sector. The Coronavirus collapse saw the real estate index drop by 42% from top to bottom. Here are the individual stocks in the index:
| Company | ASX | Coronafall % Feb-20 March23 |
| Stockland Group | SGP | -67% |
| Charter Hall Group | CHC | -62% |
| Scentre Group | SCG | -60% |
| Vicinity Centres | VCX | -59% |
| Unibail Rodamco Westfield | URW | -53% |
| GPT Group | GPT | -52% |
| Abacus Property Group | ABP | -51% |
| Mirvac Group | MGR | -49% |
| Lend Lease | LLC | -49% |
| Growth Point Properties | GOZ | -44% |
| Cromwell Property Group | CMW | -42% |
| Dexus Properties | DXS | -39% |
| SCA Property Group | SCP | -34% |
| Waypoint REIT Ltd | WPR | -28% |
A-REITs are usually classified into three sectors: retail; office; and industrial. As you can see above, real estate in the retail space was hit hard. Everyone in lockdown, stores and foot traffic was reduced to nothing. Stockland Group (ASX:SGP) hit the hardest falling some 67% followed by Charter Hall Group (ASX:CHC) down 62%. Vicinity downgraded its earnings forecast by 2.2 % as shopping centres were reduced to ghost towns with no foot traffic. Retail property stocks were once a great place for defensive investors to park their cash because people always need to eat, drink coffee and socialise. But as we saw, a lot of these norms changed. One of the biggest risks retail property groups faced is vacancies and business bankruptcies. The retail property sector was at the epicentre of this risk but with a vaccine around the corner and most of Australia out of lockdown, have we passed the turning point? Some of the above A-REITs are ‘oversold’ and it can be an opportune time to buy.
With that in mind we think the BetaShares Legg Mason Real Income Fund (RINC) invests in an actively managed portfolio of listed Australian real assets, such as A-REITs, utilities and infrastructure securities. It’s target is to generate an after-tax income yield higher than that produced by the S&P/ASX 200 Index, and to increase that income above the rate of inflation.
| Sector Allocation | % |
| Diversified REIT | 31.5% |
| Retail REIT | 23.8% |
| Multi utilities | 20.0% |
| Gas & electricity grids | 7.9% |
| Airports, ports & rail | 6.7% |
| Office REIT | 5.0% |
| Industrial REIT | 4.1% |
| Toll roads | 0.9% |
The ETF fell by 40% during the Coronavirus collapse and has recovered by 15.82% so far. It still has a while to go before it is trading at pre-Corona levels. For that reason, we think the ETF gives investors exposure to sustainable income which is expected to rise with inflation from a portfolio of property companies that are expected to recover over the next year.
Betashares says “due to their strong market positions, and the growing demand driven by population growth, real asset companies often have the ability to raise prices, in some cases above inflation, irrespective of the business cycle. In other words, real assets generally have the ability to protect future income from inflation. This makes them relatively defensive investments.”
There are concerns that shopping centres will not return to their former glory due to the digital e-commerce revolution that took place during lockdown. We think this theory is a little overdone. Australians flocked to shopping centres across the country earlier in the year, as coronavirus restrictions began to ease during the first wave. Once lockdown restrictions are eased, shoppers will return to their local shopping centres and share prices will start to reflect higher earnings. We think RINC is in the perfect position to capture this uplift.
| Portfolio Holdings |
| Name (in alphabetical order) |
| AGL ENERGY LTD |
| APA GROUP |
| AURIZON HOLDINGS LTD |
| AUSNET SERVICES |
| CHARTER HALL LONG WALE REIT |
| CHARTER HALL RETAIL REIT |
| DEXUS |
| SCENTRE GROUP |
| SHOPPING CENTRES AUSTRALASIA |
| STOCKLAND |
