In its 2014 A-REIT sector review – which surveyed 23 A-REIT fund managers on their performance for the year ended 30 June 2014 – Lonsec found A-REIT managers achieved returns of 12.7 per cent for the year, but also identified several ongoing risks, including significant concentration of the sector.
“The structure of the A-REIT sector, each of the funds typically has a substantial exposure to a small number of securities,” the report said.
“At the end of July 2014, the 10 largest stocks accounted for around 89 per cent of the capitalisation of the S&P/ASX 200 A-REIT Accumulation Index.[While] the five largest names accounted for about 62 per cent,” it said.
The report also found the sector has been shrinking over the year due to corporate activity, such as the potential for Westfield Corporation to relocate to the United States.
“This will place greater emphasis on capacity management as a driver of success for fund managers in the sector,” the report said.
“Some managers may find that their relatively large size makes it harder for them to generate alpha,” it said.
Lonsec senior investment analyst Peter Green said investors who are looking for “alpha” from their A-REIT exposure should consider an active manager.
“There are several aspects that we seek from active managers”, Mr Green said. “These include experience ‘through the cycle’, as well as proprietary commercial property experience.
“[Also,] we like to see the depth of research coverage, so that the manager can thoroughly investigate smaller, or non-index, opportunities.”
