Market Watch

The return environment in commercial real estate has become more challenged, with pockets of outperformance matched by underperformance, not only across the sectors but, more frequently, within the same sector.

Against this backdrop, passive portfolio management pegged to a benchmark has begun to look outdated.

By shifting our focus to one of active management with the freedom of a benchmark-unaware approach we now have more levers to pull in terms of portfolio construction and risk management.

This means we can take a more holistic approach to the construction and management of the portfolio, better capitalising on opportunities in the real estate market and managing the downside risks.

Sector selective

A great illustration of how we can better manage risk for our investors is how our active approach has allowed us to de-weight the portfolio’s exposure to the retail sector.

Over the course of the last 18-24 months our research had helped us identify that investments in the retail sector would be challenged from a returns perspective for the next few years due to the continued rise of online shopping and cyclical headwinds such as low wages growth and a more moderate housing market.

However, the Australian Real Estate Investment Trust (AREIT) index – in which we were previously invested – has a ‘look-through’ exposure to the retail sector of about 50 per cent.

By adopting an approach that means we are no longer constrained by this passively-managed AREIT exposure, we have instead been able to build a bespoke portfolio of retail assets, being selective about the type of assets that we are comfortable holding.

These include assets such as dominant regional shopping centres, as well as neighbourhood and convenience-based centres, which have a point of difference that means customers will continue to shop there, resulting in the asset continuing to be able to attract tenants throughout the market cycle.

Backing the winners

Conversely, active management has also allowed us to double down in areas that we see providing runways to growth.

Industrial real estate, and, in particular, logistics-related assets, has been a real outperformer as it is positioned as a beneficiary of the growth in e-commerce, and as a result of our active management approach we have been able to increase our exposure to this sector.

Similarly, in the office market, we are currently focused on the Sydney and Melbourne CBDs where there has been a significant withdrawal of stock over the last few years. As a result, there’s been limited new supply in the market and that has resulted in record low vacancy rates in both of those markets.

Another structural trend that we are looking to take advantage of is the global aging population. This translates into growth in healthcare real estate facilities and low-cost retirement housing assets, such as manufactured housing. We have been able to increase our weighting to these exposures, resulting in a well-diversified portfolio.

Conclusion

By having the flexibility to target growth sectors while being selective in our exposure to under performers, we feel confident we can deliver better diversification and risk-adjusted returns for our investors.

https://vimeo.com/355947376

Author: Claire Talbot, Fund Manager – Real Estate Sydney, Australia

Source: AMP Capital 11 Sept 2019

Important notes: While every care has been taken in the preparation of this information contained in this website, neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information on this website, and seek professional advice, having regard to their objectives, financial situation and needs. Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice.

If you’re a celebrity in New York, an apartment in a Tribeca warehouse conversion is a prized accessory. Taylor Swift has a place there, as does Beyoncé. One apartment block on Greenwich Street recently boasted a roll-up of owners that included Justin Timberlake, Jennifer Lawrence, Harry Styles and Jake Gyllenhaal. Despite their exclusivity today, some of the most prized aspects of these conversions betray their more utilitarian origins – their high ceilings and large windows allowing for natural light and airflow through the crowded workspaces of yesteryear.

From the Embarcadero in San Francisco to Shoreditch in London, and closer to home in suburbs like Docklands in Melbourne, inner-city industrial suburbs across the globe have been transformed into sought-after residential postcodes. Emblematic of this trend was the announcement this year that the City of Sydney will rezone entire blocks of warehouse space in Alexandria to create a new cultural and entertainment precinct.

As residents and developers moved in, traditional industrial tenants have fled to the suburbs, into larger premises with cheaper rent. For retail logistics in particular, this made sense: the stores they were supplying were larger and increasingly located further away from traditional urban centres.

In an interesting reversal, however, the paradigms that forced industrial space out of our city centres and into the suburbs no longer hold true for retail logistics. As sales move online, and the time taken to span the “last mile” from warehouse to consumer becomes the critical metric for retailers, proximity is fast becoming king, and thanks to decades of competition from booming residential markets, space is at a premium.

This isn’t just about the more traditional, package-based model of online retail – It is true even for bulk retailers such as grocery stores – much of the demand for inner-city warehouse space is being driven in Australia by Australia’s largest super-market chains, responding to consumer demands which today require deliveries to be with the customer almost immediately. The trend may well be amplified by the increasingly refined power of retailers to predict purchasing behaviour, and transport and store products in proximity to their customers in anticipation of the purchasing decision, ensuring the right inventory product mix is being warehoused at the right location.

The result, in most major cities, would be a significant shortage of well-located, strategic industrial product. Returns for those who have held on to inner-city industrial space, or taken the time to invest strategically in infill urban logistics, are, in our opinion, likely to be sustained and substantial, further leveraged by trends towards inner-urban living, increasing pace of lifestyles and advances in technology.

Property values in these areas will likely be more resistant to any down-turn in the market than more remote sites, as investors continue to realise the benefit of strong cash flows from retailers who are prepared to pay a premium to get their products into the hands of consumers on shorter turn-arounds than their competitors.

There will be few better examples of these dynamics in action than in South Sydney, which is at the centre of a perfect e-commerce storm. Already located on the doorstep of Kingsford-Smith Airport, Australia’s busiest freight airport, and Port Botany, our second-largest container terminal, industrial property in places like Alexandria and Waterloo has long benefited from its location between these two hubs and the dense inner suburbs of Sydney. Today, this advantage has been super-charged by residential developments which have created Green Square, the densest urban area in Australia, right in the midst of these existing industrial holdings. Add in the completion of WestConnex, the Sydney Gateway project and the Port Botany Rail Duplication, and it’s not hard to comprehend that demand for logistics space in this neighbourhood is only likely to increase into the foreseeable future.

Author: James Maydew, BSc (Hons), MRICS Head of Global Listed Real Estate, Sydney, Australia

Source: AMP Capital 29 August 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

The holy grail of active investing has always been alpha, the excess return of active investing over passive investing. Research suggests the era of alpha is over, but it’s not as simple as it seems.

Earlier research claims two-thirds of active Australian equity managers are not delivering alpha, net of fees¹.

The assertion might be right, but behind it is a much more complicated story.

Active Australian equity managers have performed below expectations over the past five years. It has led to significant mandates being pulled from active managers and a switch to passive and factor-based investing. Not helping is investor sentiment towards being underweight on Australian equities.

Considering the performance, it should come as no surprise then that ‘mega funds’ have pulled mandates. The market is sufficiently small that when you scale you quickly become the market. This means it is difficult to generate reliable alpha at this size while paying active fees to a number of core managers.

At AMP Capital, we believe there are strong pockets of alpha to be found in the Australian market for those managers that are looking in the right places and correctly tailoring their approaches.

Benchmark-aware strategies have struggled

Alpha does exist in the Australian market although it is not as broad-based as it once was.

Over the past five years, we have observed a noticeable decay in the alpha of benchmark-aware strategies of all styles. Long-only or long-short, growth or value, small-cap, large-cap and others; all have experienced the same fate. According to the MercerInsight^® database, one-year alpha of the median Australian shares manager is at record low levels over the available history which almost stretches back as far as the formation of the Australian Securities Exchange which was in 1987.

On the upside, we are instead seeing strong pockets of alpha among concentrated managers that employ hybrid ex-50 strategies, which is how we manage the AMP Capital funds. These high alpha strategies typically have limits of around $3-$5 billion, due to the relatively small size of this asset pool.

High alpha for all sizes is a matter of technique

Alpha in the Australian market does not scale well.

This means that when managing larger assets, there is no effective ‘lift-and-shift’ or upsizing of investment strategies. High alpha strategies that work for smaller investments can’t be borrowed and applied to larger ones. They just don’t fit.

What that means for the mega super funds and industry funds out there is that there are limitations to extracting alpha from the market. When you are already such a large slice of the market, it is difficult to be in the pockets of the market that are conducive to alpha.

Instead, there is a technique to building specific high alpha strategies for larger assets. Typically done in increments of around $10 billion, they also come with nuances to avoid over-diversification while gaining access to top quartile managers at low fees.

The strategy we observed elsewhere in the marketplace was to employ a collection of benchmark-aware managers. The funds that did this are typically the ones that have underperformed in the last five years. Investors have subsequently replaced them and gone passive or terminated them.

At AMP Capital, our approach to managing large Australian equity funds is to have a high alpha bucket and an enhanced quant bucket. Such an approach avoids most core managers, instead selecting managers that take large active positions or have exposure to ex-50 companies diversified with enhanced quantitative strategies. In terms of the fee structure, this kind of ‘barbell’ approach avoids paying active fees for no alpha.

AMP Capital’s MySuper and Future Directions funds employ a style where we commonly have a 50-50 barbell setup of enhanced and high alpha strategies; 50% enhanced and 50% active. We only hold concentrated managers and have a sizeable exposure to the ex-50.

This approach offers a blend of long-horizon, high-conviction fundamental managers with short-horizon quantitative strategies. Further, by maximising active share, this balance of managers avoids the excessive diversification that comes with investing in a set of core managers.

In-house investing takes commitment

Another matter is that of large funds bringing some or all of their investment teams in-house. Industry super funds internalising their investment teams is a new territory that is largely untested, bringing additional operational complexity without the guarantee that they will deliver better performance.

The maturity of the operation has a lot to do with how resilient it will be when performance falls short; in particular, its governance capability to assess or replace internal investment teams and determine how the fund will recover. If you decide to wear both hats, you can’t fire yourself if something goes wrong.

AMP Capital employs internal and external investment teams. Most of our external managers are near capacity or closed and have not experienced major cash outflows, implying there is no threat to their business models from internalisation, and our internal managers are well positioned relative to internal super fund managers.

For us, mature governance means subjecting internal managers to the same scrutiny as external managers, which is where we have an advantage. We continually assess our internal managers to determine whether their capabilities are institutional quality and have established processes to manage the environment.

For instance, we have a multi-manager group that manages and researches funds. This includes our internal investment teams, which are assessed against long-term success factors to see whether they are appropriate at the multi-manager level. Once a manager is selected, they are continually monitored for any significant events including changes in the team or process. Such events would lead to the initiation of a formal manager review from which a course of actions is developed to avoid a deterioration in performance.

For large funds that may be thinking about internalising their investment teams, there’s an argument that the fund will be able to save cost and pass that on as reduced fees. By using our internal teams, we believe we bring the same advantage – cost advantage, the ability to customise mandates, and access to information and portfolio managers – plus the governance to deal with situations that arise from things not performing to plan.

Conclusion

While Australian equities are a narrow market, pockets of alpha still exist, but have become more difficult to extract.

Individuals are unable to directly access many of the top quartile managers that have had success and quickly become closed to new investment. These capacity constraints mean that alpha doesn’t scale well in the Australian equity market.

A team of professionals that have a process and track record of investing in top quartile managers before they close could assist an investor in finding the alpha in the Australian equity market.

¹ Ronald N. Kahn & Michael Lemmon (2016) The Asset Manager’s Dilemma: How Smart Beta Is Disrupting the Investment Management Industry, Financial Analysts Journal, 72:1, 15-20, DOI: 10.2469/faj.v72.n1.1

Author: Duy To, Portfolio Manager Sydney, Australia

Source: AMP Capital 16 Sept 2019

Important notes: While every care has been taken in the preparation of this information contained in this website, neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information on this website, and seek professional advice, having regard to their objectives, financial situation and needs. Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice.

One of the most common images associated with retirement is finishing work and walking away with a lump sum of super money to splurge on a new car, boat, caravan, holiday, or perhaps if you’re lucky, all of the above.

But it’s an outdated stereotype. Research shows that in the 10 years from 2004 to 2014, the payment of super as an income stream increased far more quickly than lump sum payments did, and by 2014 only around 16 per cent of retiring Australians took their super in the form of a lump sum.¹

But are Australians right in their preference for income streams rather than lump sums? And is there another alternative?

When lump sums pay off

There are some benefits to taking lump sums.

Depending on the retiree’s circumstances taking a partial lump sum may be the best option if you have outstanding debts or health issues that require expensive treatment.

The Australians that do take lump sums mostly use them sensibly: they use the funds to pay off mortgages and debts. In fact, around one quarter of lump sums are used to pay off mortgages or make home improvements, while another 20 per cent are used to clear debts or buy a car.²

Lump sums can also be advantageous in the implementation of specific financial advice strategies, such as to manage cash flow from retirement accounts subject to the $1.6 million transfer balance cap.

And they can be useful where retirees are trying to reduce the impact of tax to be paid on death.

Growing future cashflows

But there are also some downsides to lump sum super withdrawals.

The biggest downside to taking a lump sum in cash is that it can then be harder to grow retirement savings into a much larger stream of cashflows in the future.

Even modest retirement savings, when invested appropriately and drawn down as an income stream, can make a big difference to the potential to live life comfortably and enjoy retirement.

For example, a single homeowning retiree with $200,000 in retirement savings may be surprised how that money, if sensibly invested, could significantly change their retirement lifestyle.

If invested to achieve an average annual return 3 per cent above the rate of inflation, they would receive $13,000 (a figure which would increase with inflation) per year for 20 years.

With the government Age Pension for a single homeowner currently worth $23,000 per year, that sum plus the cash flow from their investment increases their annual spending power to $36,000 per year – a significant 55 per cent increase in their annual income. This is illustrated in the chart below.

Source: AMP Capital, 2018

A third way

Ultimately, managing money in retirement is all about confidence, and it’s an unfortunate reality that many retirees are too uncertain about what the future may hold to enjoy their savings.

Uncertainty around investment returns, health costs and how long their money will need to last all combine to make most Australians ‘over-save’ throughout their retirement – to the benefit of the next generation, but at the cost of living retirement to its fullest.

But by segmenting their retirement savings early in retirement, retirees can invest their money in different ways to match their different needs, goals and the risks they face rather than simply investing their money in its entirety and drawing down an income.

A financial adviser can help you prioritise your goals, work out how much money to allocate to each goal and then choose an investment strategy that maximises the chances of reaching each goal.

Types of retirement goals

Retirement goals can be diverse, but most belong to one of three main categories: essential needs, lifestyle wants and legacy aspirations.  

Essential needs – include things such as food, housing, transport and bills. To meet these goals a steady cash flow, which keeps up with the cost of living is important.

Lifestyle wants – include things such as enjoying hobbies, holidays or new, big ticket items such as a car or caravan. To help fund these goals, investments should grow steadily over time and have a low probability of producing major losses.

Legacy aspirations – include leaving something for future generations which retirees with additional financial resources may aspire to do. Money allocated to these goals should be invested to deliver strong, long-term compound growth.

Taking a goals-based approach could give you the confidence to enjoy your retirement to the full.

^{1, 2} Australian Centre for Financial Studies, Funding Australia’s Future Financial Issues in Retirement: The Search for Post-Retirement Products, October 2015.

Author: Darren Beesley, BCom FIAA, Head of Retirement and Senior Portfolio Manager, Sydney, Australia

Source: AMP Capital 17 Jan 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.

The outlook for the global economy remains reasonable, although the risks are tilted to the downside. The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover. Looking forward, growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.

Employment has grown strongly over recent years and labour force participation is at a record high. The unemployment rate has, however, remained steady at 5.2 per cent over recent months. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, September 3rd, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.

The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.

Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The unemployment rate is expected to decline over the next couple of years to around 5 per cent. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 per cent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney and Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, August 6th, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au