Reading time: 3 minutes
The BetaShares Legg Mason Real Income Fund (managed fund) (ASX: RINC) has been trading on the ASX since 13 February 2018. RINC employs the same strategy as the unlisted Legg Mason Martin Currie Real Income Fund, which recently celebrated its 10th birthday.
In this contributed article from Franklin Templeton, which acquired Legg Mason in February 2020, Franklin Templeton’s Peter Cook asks Ashton Reid, Portfolio Manager of the Legg Mason Martin Currie Real Income Fund, about lessons learned over the past decade, and the outlook for the sector.
Ash, the Legg Mason Martin Currie Real Income Fund (Real Income Fund) has recently had its 10-year anniversary. To begin, could you tell me a little bit about the genesis of the fund, what led the team at Martin Currie to develop this product?
Our primary focus was on investor needs, and particularly the transition from accumulation to retirement. When that happens, your needs change dramatically. You’re no longer earning a regular income, you’re retired for a long period and therefore face longevity risks, and importantly the need to maintain spending power becomes paramount.
Looking at those significant changes, there was a clear need for a new income solution. The objective became clear: the need for a growing dollar income stream that both was stable and incorporated inflation protection.
We quickly identified that real assets had an important role to play in an investment landscape that had seen traditional fixed income look less appealing given interest rate suppression. Real assets occupy the space between bonds and higher-risk equities, with the added appeal that returns are predominantly driven by population growth over the economic or business cycle.
Historically, listed real assets were mostly focused on Real Estate Investment Trusts (REITs). Yet, when looking at the major A-REIT index-based products, we saw then, and continue to see today, heavy stock concentrations. Persistently, the top five index names have summed to over 60% of portfolios, a concentration that we believe is simply unhealthy from a security of income perspective. So if you are using an index exposure as your real asset solution, you’re highly likely to face diversification issues. We wanted to avoid those unnecessary risks and build a sensible, well-diversified income portfolio.
Our solution was to build a real asset portfolio that had broad exposures to high population growth countries in Australia and New Zealand, while avoiding unhealthy stock concentrations. Population growth is all-important for real assets, with Australia’s high population growth rate a fantastic fillip for investor returns and income outcomes.
Source: Martin Currie Australia, FactSet, ABS, UN Population Division; latest available as at 30 September 2020.
So how could people think about using a real asset investment solution like the Real Income Fund?
While it depends on your specific situation, investors should consider our Real Income Fund as having an attractive yield when compared to fixed income, yet risk levels that are generally lower than equities. In an overall portfolio context, real assets have exhibited less correlation to the business cycle than broad-based equities, as they are typically driven by population growth and so they’ve also played a role in reducing overall portfolio risk.
In that context, the Real Income Fund can be considered as a potential replacement for, or supplement to, fixed-income allocations and more narrowly defined property solutions, especially when considering the specific needs of income investors that we were discussing earlier. Finally, when compared to equities, real asset yields are appealing with correlations to the broader business cycle typically much lower, given the fundamental nature of the real asset investments.
So, in many senses, real assets have an important role to play within portfolios, particularly from an income perspective but also for their less correlated total returns and reduced absolute risk profile relative to equities.
COVID-19 has been the main story driving the economy this year. Could you give us some perspective on how the Real Income Fund has performed through this time, and how the team has approached managing through the crisis?
There’s been no escaping that real assets have been at the epicentre of social distancing and enforced government lockdowns. We’d stress the artificial nature of these lockdowns stopped people going about their everyday activities, and this had a sizeable impact on real asset cash flows.
While it was a very difficult period, it was also an important opportunity for us to add value as active managers and position the Real Income Fund intelligently for the future. During the crisis, we focused on those real assets that could keep collecting cash flows and rents, even while everyone was still sleeping.
Can I play devil’s advocate here and ask you to elaborate on what you mean by artificial? Some people would say there’s nothing artificial about the fact that it’s happening, but I think what you’re speaking to is a point about how people behave and what that means for the long term.
Exactly, that’s right. I use the term ‘artificial’ in the sense that the crisis and the government restrictions have artificially changed the choice architecture of people’s lives. People are instinctively social; once the COVID risks are reduced, we believe that the natural course is for people to get back to their everyday lives, at least in terms of real assets.
That’s not to downplay the disruption that we saw in the crisis, and there’s certainly a cash flow impact, but we see the bulk of the crisis impacts as cyclical, not structural. That’s why we use the term artificial.
Is there anything else that stands out for you about the Real Income Fund or what you’ve experienced over the past ten years?
While we’ve built the Real Income Fund as a potential solution for retirees moving into their income needs, we’ve also seen how the fund can work in a diversified portfolio context. Because real assets typically have a lower correlation to the business cycle, the fund has tended to act as a great diversifier to reduce broad portfolio risk.
Something I think about regularly as we’re managing the Real Income Fund, is how we’ve seen various charities use the fund for real asset exposure to source regular income in their broader portfolio mix. With the Real Income Fund helping those charities meet their investment needs and facilitate their charitable work in our communities, it’s a focus for us to deliver for them so they can deliver for their stakeholders.
Key benefits of the BetaShares Legg Mason Real Income Fund (managed fund) (ASX: RINC), which is managed by Martin Currie Australia using the same strategy as the unlisted Legg Mason Martin Currie Real Income Fund:
- Opportunity to earn attractive, sustainable income, through investments in ‘hard’ physical assets which are expected to pay strong dividends from reliable income streams.
- Targets a return above inflation through investments in real asset businesses with pricing power.
- Reduced concentration risk relative to Australian Property Securities Index (A-REIT Index).
There are risks associated with an investment in RINC, including market risk, sector risk and market making risk. For more information on risks and other features of RINC, please see the Product Disclosure Statement, available at www.betashares.com.au. RINC should only be considered as a component of a broader portfolio.
BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181) (BetaShares) is the issuer of the BetaShares Legg Mason Real Income Fund (managed fund) (ARSN 621 862 619) (Fund). BetaShares has appointed Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) (Legg Mason Australia) as investment manager for the Fund. Legg Mason Australia is part of Franklin Resources, Inc. Martin Currie Australia, a division within Legg Mason Australia, provides the investment management services for the Fund. Any reference to ‘Legg Mason Australia’ or ‘Martin Currie Australia’ is a reference to Legg Mason Asset Management Australia Limited. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting BetaShares on 1300 487 577 or Legg Mason Australia on 1800 679 541 or at www.betashares.com.au or www.leggmason.com.au. This information does not take into account the investment objectives, financial objectives or particular needs of any particular person. None of BetaShares, Legg Mason Australia or any of their related parties guarantees any performance or the return of capital invested.