Standard Life Global REIT Advice

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taytoman

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Hello

I invested approximately 20k in the standard life global REIT fund just over 2 years ago. This lost about 2/3ths of its value during the financial crisis, and is now back at 1/2 its original value. Basically it is a fund composed of shares in global property companies. It is not geared, but the companies themselves are about 30-40% geared. About 45% is in the USA, and the rest is spread globally.At the moment, it is now about 10% of my total investments.

I am well aware about the advice to talk to a financial advisor (bought it execution only) and investments are long term considerations etc.

I fully understand why it has lost its value

My query is whether anyone knows what the outlook going forward is for global REITs, and whether they are viewed (in terms of asset diversification) as shares or property. This is such as specialist fund that i'm not sure that an independent financial advisor is going to know much about this

Any REIT experts out there?
Thanks in advance
Taytoman
 
Taytoman,

Have a look at [broken link removed]

As you can see, we recommend that our clients use REITs to gain property exposure in our portfolios and I have been personally investing in REITS for about the last 10 years.

REITs behave more like equities than physical property and recent price changes reflect the expectations of the future prospects for global real estate. The reductions in the price you describe simply reflect the view that property prices and rents around the world are declining - in this sense REITs lead the physical property market both on the downside and since March 2009 have recovered considerably reflecting investor's views about the future prospects for Real Estate.

In order to make a better guess about the future prospects for REITS than the current prices are indicating, you would need to make a better guess than all the market participants around the world.

I would therefore tend to use the current price and current yield as the best indicator for future prospects.

The S&P Global REIT Index (which this fund is effectively based on) currently has a distribution yield of 3.13%. This compares to 1.75% for the MSCI World Index.

It should be mentioned that Standard Life are offering an "active" fund with a relatively high annual management charge compared to buying the S&P Global REIT index passively.

However, compared to global equities, Global REITS are currently offering more income and on that metric alone investors should consider REITS.

The average annual return in Euro since 1999 of the S&P Global REIT index has been 7.26%pa with a standard deviation of 18.99.

This compares to an average annual return of 0.45%pa for the MSCI World Index with a standard deviation of 16.23%.

Therefore REITS have been slightly more risky than the MSCI, but have compensated investors with a better average return since 1999.

The correlation between REITS and the MSCI World Index has been 0.612 suggesting that REITs are a separate asset class to Global Equities with a diversification benefit within a portfolio.

This would suggest that investors should benefit from holding REITS in a globally diversified portfolio.

I would suggest that you could probably improve your costs in this asset class compared to buying the Standard Life fund.
 
Marc said:
I would suggest that you could probably improve your costs in this asset class compared to buying the Standard Life fund.
Click to expand...

Can you give us comparable costs (initial and ongoing) for your alternative, for someone with 10/20K to invest in a REIT, that has same/similar tax structure?
 
Marc

Thank you very much for your very comprehensive and informative response. As an aside, the charge is actually 1.5% approx as they add 0.25% to the policy value annually.

My question is is also now where can I access the S&P
 
Gerard,

The funds we recommend are taxed under the gross roll up regime with a notional exit tax every 8 years on exactly the same basis as the Standard Life fund. We also typically recommend funds which are domiciled in Ireland.

Our brokers would charge 0.125% to buy and sell an exchange traded fund so the round trip to buy and sell would cost a quarter of 1% in transaction fees.

There is also a bid ask spread and based on live prices today this is 0.45278%

That would imply transactions costs of around 0.7% for a round trip buy and sell.

For annual fees, I prefer a Total Expense Ratio (TER) measure since this includes additional costs such as custody and administration which are not included in the annual management fee. As you are probably aware Irish funds do not typically publish TERs

The UK OEIC version of the Standard Life REIT has a TER of 1.56% and I would suggest that this would be a reasonable reflection of the real cost of investing in the Irish fund (excluding expenses born by the fund such as trading costs, brokerage commissions stamp duty etc) although "mirror funds" can work out more expensive - you would really need the audited report and accounts and I suspect they are not easy to get hold of.

For comparison, the fund we typically recommend has a TER of 0.59%pa.

So, that would suggest an annual difference in fees of just shy of 1%pa.

For reference, assuming a 6.5%pa compound return, a 1% difference in fees equates to a difference of €938.52 per thousand over a thirty year period.

Taytoman,

I tend to use the S&P Global REIT index mainly for research. Investors can gain access to the REIT market through a variety of low cost index funds which track the FTSE/NAREIT index.

If you would like a review of your portfolio, please contact me directly.

All the best,
 
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