With over 130 fund managers in Australia, it's very rare for one provider to have a fund with a successful formula that is yet to be copied by competitors. Yet this appears the case with Legg Mason's Australian Real Income Fund. The four-year old fund remains so unique that it has no readily-identifiable peer group for comparison – without a recognised real assets category the Mercer survey includes it alongside mainstream Australian equity funds.
Despite being included in a group that includes some of Australia's best known fund managers in the equity space, the Real Income Fund is the top performer against all equity funds in the year to March 20151, even with its fees subtracted and despite its lower risk profile. It returned 34.52% in this 12 month period before fees (33.7% net2). Over three years its performance was 24.6% per annum before fees.
Brisbane-based adviser Ian Auld from FinGuard Financial Planning saw the potential of the Real Income Fund early, and began including the product in client portfolios in 2012 as an income solution. "Since 2009, we have been constructing client portfolios that are designed to achieve high and consistent levels of tax effective income. We have been scrupulous in only including assets and management that complements and strengthens what this approach delivers to our clients. We included the Legg Mason's Real Income Fund in this regard because it was (and certainly still is) a standout from a risk perspective and pleasingly my clients have reaped the rewards of this particular advice decision."
Ian is not alone in moving to include a greater share of real assets in client portfolios. An increasing number of advisers in groups where the Fund is positioned on APL's, such as AMP and IOOF have already moved or are considering the Real Income Fund as part of a diversified income line-up.
The Real Income Fund is unique because it includes an unmatched allocation to three buckets of real assets: listed property (AREITs), utilities and infrastructure. Generally, these groups aim to provide a relatively stable income flow, natural inflation protection, instant liquidity as they are ASX-listed, and low risk relative to equities or listed property sectors.
The Fund currently holds 30 stocks with major holdings that include: Charter Hall Retail, Novion and Stockland (AREITs); AGL Energy and Meridian (listed utilities); as well as Transurban and APA (listed infrastructure).
The Fund was designed and built in 2010 after consultation with a small focus group of advisers, who provided Legg Mason with a brief to build a new solution that could deliver attractive income without throwing the risk budget out the window. If that wasn't challenging enough, the wishlist extended further: the fund had to be easy to understand and explain to investors, have easily-recognised investments, provide daily liquidity for cash withdrawals and have no complex hidden derivatives, options or leverage that could potentially catch advisers out years later.
What Legg Mason came up with was potentially the holy grail for investors seeking that elusive stepping stone away from the perceived safety of term deposits. The Real Income Fund was designed to provide a higher income return than both term deposits and the AREIT index. Risk is expected to be lower than equity dividend income funds and even stand-alone listed property funds, given its greater diversity against this market.
Did Legg Mason fulfil the 'simple-explanation' brief? Pleasingly, it doesn't get much simpler than a straightforward shopping example for advisers to explain to clients: imagine a shopper who needs to travel on a toll road (infrastructure) to their local shopping centre (AREIT). If they buy groceries, when they return home they will cook their meal using electricity or gas (utilities). In theory that's three unavoidable clips the Fund receives, multiplied over a large population in either boom or bust times. This makes the Real Income Fund so compelling as an investment concept as the assets are basically written into the fabric of our everyday existence.
Ian Auld takes a big picture approach when describing the Real Income Fund to new clients. "Because the real assets in this type of fund are all around us, it follows that everyday, everywhere, Australians are contributing to the performance of this investment. There aren't many other products in client portfolios that have this attribute".
With such strong returns since the Fund's inception in December 2010, you would be forgiven for asking whether the good times can continue. Portfolio Manager Ashton Reid describes the future return potential as two-fold: on the income side, the performance is expected to be relatively stable and grow faster than inflation in the longer term. "Many of the assets in the fund, such as infrastructure, have contracts in place to increase pricing with inflation. This helps protect investor returns". The fund manager is forecasting a franked yield on the Fund of 5.8% over the next 12 months, slightly lower than the past 12 months (6.8%).
On the capital side, “Though not our base case, when you observe the current market-based yield of Fund's spread over long bonds, a case can be made that the Fund has the potential to deliver further strong capital gains above the organic growth the assets enjoy.”
Interest in the Fund is growing domestically but Reid admits strong interest has also come from offshore. Legg Mason is currently building global platforms to release the Fund's broader strategy in both Asia and Europe, given how well the strategy stacks up on a risk and return basis to other offshore investments.
Back in Australia, Legg Mason is hosting its own retirement income symposium on June 16 and 18, in both Melbourne and Sydney, which will feature the Real Income Fund strategy. Those interested in attending can register at [email protected].
2 Returns are based on the one-year composite, gross of fees, calculated by Legg Mason. Net return is not part of the Mercer Survey.
Free Real Income Adviser Kit
Legg Mason is this week running a ‘Real Horizons’ drive, where advisers can call 03 9017 8614 and receive one of 50 complimentary Real Income Adviser Kits. This kit includes a guide to foster conversations with clients about their income needs, as well as other educational material about real assets. The first 20 callers will receive the option of dual branding with their own company logo.
For further information on the Real income Fund, call the Real Horizons hotline on 03 9017 8614 or visit leggmason.com.au.
Real Income Revealed:
*After its launch the Fund received Rainmaker's 'most innovative new product' award in 2011.
*The investment manager of the Fund is Martin Currie Australia, one of seven Legg Mason fund managers. Martin Currie Australia was formerly known as Legg Mason Australian Equities.
*The Legg Mason Property Securities Trust, also managed by Ashton Reid, is a finalist in this year's Lonsec/Money Management Fund of the year awards with winners announced 21 May.
Past performance is not a reliable indicator of future performance.
1 Mercer Investment Performance Survey of Australian Shares as at 31 March 2015. Returns are stated gross of fees.
2 Returns are based on the one-year composite, gross of fees, calculated by Legg Mason. Net return is not part of the Mercer Survey.
Any reference to “Legg Mason Australia” or “Martin Currie Australia” is a reference to Legg Mason Asset Management Australia Limited ABN 76 004 835 849 AFSL 240827. Martin Currie Australia is a division of Legg Mason Asset Management Australian Limited. Neither Legg Mason Australia, nor any of its related parties, guarantee the repayment of capital or performance of any of the trusts referred to in this document. Past performance is no guarantee of future performance. Applications to invest in a Legg Mason Trust can be made using an application form comprising part of the current Product Disclosure Statement, which is available from our offices or on our website at www.leggmason.com.au. Certain eligibility criteria applies. Legg Mason Australia does not guarantee the accuracy or completeness of this document. To the extent permissible by law, Legg Mason Australia accepts no liability in contract, tort (including negligence) or otherwise for any loss or damage suffered as a result of reliance on this document. This document does not constitute investment advice, and has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should read the Product Disclosure Statement carefully and you need to 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.
