Sometimes in funds management we make our own crosses. We carry them, although not necessarily willingly.
Over the last twelve months, the AREIT Index delivered a total return of 23%1. The ASX 200 Accumulation Index meanwhile was up just 2.4%. Following in the footsteps of our benchmark, APN’s AREIT Fund delivered a total return of 25.07%2 pa.
In our meetings with advisers and investors in early 2016 we set long term expectations of returns of between 9 and 10% a year, most of it from income rather than capital growth. This years cross is therefore twice as heavy as the one we hope to carry. It’s worth understanding why.
We live in unusual times. Tuesday’s 0.25% cut takes the cash rate to just 1.5%. Australian 10-year bonds have never been as low as they are now. This situation is repeated the world over. One third of the global bonds market now trades at rates less than zero. Swiss 50-year bonds are priced at a negative rate.
Financial markets, as reflected in bond yields, are predicting an extended period of low growth, recessions and low interest rates. It may not play out like that but that’s what the market is telling us.
A fund targeting stable, low risk returns that somehow manages to deliver 25% pa might seem incongruous but against this backdrop, it’s much less so. In this environment, any investment delivering secure regular income has appreciated in price.
Whilst we would like to claim credit for the performance (and we do a bit) there’s a structural component implied by the current pricing. Rates are going to be even lower for even longer, which means that current AREIT prices may not be as stretched as they first appear. There is a sound basis for this appreciation.
Does this mean we expect next year’s returns to be just as lucrative? Absolutely not. So can we then commit to delivering a total return of 18%2 this financial year, as we have done on average each year since the fund commenced in 2009? Again, no.
Still, you can see the nature of the cross we have created. Good performance over a long period creates a certain expectation. Potential investors looking at the APN AREIT Fund’s past returns might want to incorporate that into their thinking.
APN’s Australian AREIT Fund might have enjoyed ‘racy’ returns last year but our investment strategy is as conservative and low risk as they come. We call it ‘not shooting the lights out’.
Through no fault of our own, we’ve utterly failed to not shoot the lights out in the financial year just passed. So, please do not be mislead by a 25%2 return, driven largely by capital growth. Our primary objective is to deliver dependable, attractive income over the long term. That’s what we’re focussed on and are confident of delivering. As for capital growth, it comes a long way second.