Is passive investing the key to property success?

By Killian Plastow

August 30 2017
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Many of Australia’s active property managers stick closely to their index, owing to the country’s concentrated listed property market, prompting one researcher to ask if active management is worth the fees.

Property, property investor, AREIT, A-REIT, REIT, Real estate investment trust, Morningstar

In the wake of the global financial crisis in 2008 and 2009, many Australian real estate investment trusts (AREIT) delisted from the exchange, according to investment research house Morningstar.

This resulted in the AREIT world shrinking significantly, with the S&P/ASX300 AREIT index now containing only 32 names, and with 60 per cent of the index invested in only five stocks, the research company said.

“Many active managers have responded to this unique lack of opportunity by taking very little active risk: Essentially their portfolios are similar to the benchmark,” Morningstar said.

In fact, Morningstar’s research found that Australian AREIT portfolios have been more than 75 per cent identical to the index since the global financial crisis, with their returns typically falling within 1 per cent above or below the index’s returns – while the average fee for actively managed AREIT portfolios sits at 1.1 per cent of returns.

Morningstar said this made a compelling case for investing in passive AREIT products, but also noted that not all active AREIT managers were the same, and that there’s “plenty of opportunity for skillful managers to successfully differentiate themselves”.

“The difference between the top and bottom performers within the ASX 300 AREIT Index was about 41 per cent in 2015 and 67 per cent in 2014,” Morningstar said.

“Low costs afford passive strategies a big head start when it comes to returns, however we still have confidence in a handful of active funds that have proven processes and skilled teams to outperform the index.”

Morningstar said its best rated active manager had even managed to outperform the index over rolling three-year periods 80 per cent of the time since its inception, and the additional returns this would offer to investors is “a reward that passive strategies can't offer”.

“We don’t see the point of paying high fees to an active manager for an index-hugging portfolio, so in Australian listed property we’ve tended to favour either low-cost passive managers or active managers who can truly prove their worth,” Morningstar said.

However, Morningstar cautioned investors to consider how much risk they’re willing to take on before investing into an active AREIT portfolio, as much of the outperformance achieved by successful active managers comes from investing off-index.

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