Listed property and infrastructure funds outperformed Australian shares for most of the last decade since the GFC. But we should keep in mind that the best performers in one era often become the worst–recall tech stocks and miners after their respective booms ended.
As Exhibit 1 shows, Australian property, global property, and global infrastructure have all delivered respectable outcomes. This strong performance has increased investors’ thirst for real asset funds, with all three categories growing in stature.Exhibit 1: Rolling Annual Returns – June 2010 to June 2018
Past performance does not necessarily indicate a financial product's future performance.
After a long period of growth, it’s interesting to note that both performance and assets have tailed off since 2016 – around when interest rates hit their low points, raising the question of whether listed real assets have seen their best days for the time being. We’re not predicting boom or bust for the sector, but we do note there are some significant shifts happening within the sector that are worth analysing.How Property Exposure is Changing
Before the GFC, Australian property was the favoured type of real asset exposure for fund investors. However, A-REIT fund exposure fell sharply in 2008 (see Exhibit 2). It has since recovered somewhat, but in recent years fund investors have allocated substantially more to global property and especially global infrastructure. In fact, global infrastructure recently overtook global property as the second-largest category of the three. Extrapolating the trend, infrastructure could eventually become the largest real asset category.Exhibit 2: Funds under management for real asset funds in Australia – December 2006 to March 2018
Are A-REITs Becoming Less Relevant?
The conversations our analysts had with fund managers in 2018 revealed they were concerned about the declining relevance of A-REITs. Many are focusing their marketing effort on global property and infrastructure, with A-REITs an afterthought. Some A-REIT portfolio managers share that mindset at least partly, for example, by searching for opportunities outside the local index. This has worked well for managers that have the skills and knowledge to do it, and where managers have been careful to avoid adding too much risk. But we are cautious about formerly benchmark-minded managers who have recently strayed into unfamiliar territory and are yet to prove themselves. This partly explains why our ratings in the A-REIT space remain divided. Generally, we’ve preferred either low-cost index funds, or active managers that have sufficient skill and active share in the portfolio to overcome their higher fees. We think A-REIT fund flows will mirror the bifurcation in our ratings. Managers who cannot demonstrate an edge need to up their game, or else they will see a decline in their relevance and assets under management.More Opportunities for Active Managers
In global property, we like index funds, but not quite as much as we do in the A-REIT space. This is partly because there is less agreement about what the appropriate benchmark is, but also because plenty of opportunities remain for active G-REIT managers. Even so, the diversification, low cost, and low portfolio turnover of global property index funds make most of them attractive. Global infrastructure index ETFs and funds have seen only modest asset flows so far. Again, there remains a lack of consensus about what the best benchmark is for the infrastructure sector. This is one of the reasons why our highest ratings in infrastructure are being reserved for active managers – provided they have a clear and rational strategy and the skills to navigate an undefined investment universe.This blog post is adapted from research that was originally published in Morningstar Direct™ and Adviser Research Centre. If you’re a current user, simply log in to access the full report. If not, you can take a free trial.
