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.
Resolution Capital looks at next 10 years in REITs
(Pictured: Marco Colantonio)
Resolution Capital is celebrating its 10th anniversary as an independent listed property funds manager. The Australian company, which now performs on the global stage, has had an interesting history. It seems likely, also, to have an interesting future.
This is the brief history: The business which became Resolution Capital (RCL) started as the ‘A-REIT’ (Australian real estate investment trusts) investment team at MLC in the mid-1990s, when it was owned by Lend Lease. MLC was sold to NAB in 2000 but RCL remained within Lend Lease ownership. The management, under managing director Andrew Parsons and director and portfolio manager Marco Colantonio, bought 50 per cent in 2004, followed by a full MBO a short while later. At that time, the firm became increasingly interested in investing in international REITs, as the Australian listed property trusts, led by Westfield, had also been expanding offshore. By 2006, after RCL received its first major global mandate, as a discrete unhedged REIT strategy from MLC, it decided to join the then-fledgling multi-affiliate group, Pinnacle Investment Management, run by Ian Macoun, who had previously set up the first business of that type in Australia at Perennial Partners, now a part of IOOF. In 2008, right in the heart of the GFC, RCL launched its flagship global hedged REIT fund, which is now widely available to planners and others. After two very tough years, the fund climbed out of the crisis to deliver a compound annual return of 11.6 per cent since inception, which is about twice the index performance.
Marco Colantonio says that he and his colleagues had put their own money into the fund and were very nervous about what was likely to happen to the investment world after the Lehman Bros collapse. As it turned out, they were able to take advantage of unprecedented buying opportunities.
“We were able to buy high-quality real estate at bargain basement prices,” he says. “We could get quality shopping centres, for instance, in high-barrier markets, with yields of 8-10 per cent.”
RCL prefers ‘high-barrier markets’, which are those such as New York, London, Paris, Tokyo and Sydney, where property supply gluts are highly unlikely due to geographical and regulatory constraints on development.
It is also a patient investor, with a portfolio investment turnover of less than 50 per cent a year, and manages a relatively concentrated portfolio of 40-50 stocks. Most global REIT managers have portfolios of more than 100 stocks, which is about one-third of the universe.
RCL has a team of 14, with Parsons operating out of London, and another portfolio manager out of New York. The rest are based in Sydney. Almost all of its $2.6 billion under management is Australian sourced.
Colantonio says the firm has been discussing its options to gather investments from offshore – either the US or Europe – but has not made a decision.
Parsons says, overall, there are no plans to build more of an investment presence outside Australia, at least from a portfolio management perspective.
“It’s not our present intention to increase our offshore investment personnel. Our London and New York representatives were either previously part of the Sydney team or have known the team for a long period. The importance of understanding the investment philosophy is critical and that is best achieved with a centralised research approach.”
In terms of the future of the REIT sector, with, for example, the challenges to traditional shopping centres from internet services, Parsons is confident RCL can ride the wave.
He says: “Retail property and the impact of e-commerce presents a very interesting challenge and it is fair to say few, if anyone, can honestly say they know how it will definitively play out. There is widespread acknowledgement from many industry participants, including traditional retailers and even many e-tailers, that the most powerful retail distribution platforms are “omni-channel”, that is, those utilising traditional bricks and mortar as well as internet distribution channels.
“Furthermore, shopping centres represent a comfortable meeting place for friends and family, increasingly for food and entertainment. So, as they have done for over 50 years, shopping centres are transforming, albeit the pace of change is particularly challenging. We are focused on properties in the best locations with the most productive sales because that’s where retailer demand is arguably most resilient.”
