For the first time in probably forever the NZ term deposit (TD) market has gone backwards as the low-rate headwinds hit gale-force intensity.
According to the latest Reserve Bank of NZ (RBNZ) data, local resident TD holdings fell by more than $720 million over September, reversing a trend that stretches back to antiquity or thereabouts.
Following a sustained decline in interest rates post the global financial crisis (GFC), RBNZ governor, Adrian Orr, maybe finally did the trick with his shock 0.5 per cent official cash rate (OCR) slashing this August.
At the time Orr said: “Savers in low risk deposits will need to invest more actively.”
And it looks as though some TD holders have taken Orr’s unsolicited investment advice. Whether the September TD tumble heralds a wider exodus from the safe-haven sector remains moot, but it’s a clear signal that the pressure on yield-seekers is beginning to tell.
Of course, the RBNZ figures don’t reveal how far up the risk spectrum TD emigrants have headed in their hunt for income.
However, there is a plethora of yield options on offer including some touting a link to ‘real’ assets with long-term income streams.
In November, for example, two Australian-based managers – Maple-Brown Abbott (MBA) and APN Property – toured NZ in separate campaigns outlining the income-producing merits of the “boring” asset classes of global listed infrastructure and listed property, respectively.
Both Maple-Brown Abbott (MBA) and APN Property are clients of NZ third-party fund marketing business, Heathcote Investment Partners.
Although listed real estate and infrastructure remain distinct, the two asset classes do share a common core target of delivering steady income – with a measure of inflation-protection – through long-term economic cycles.
Lachlan Pike, Maple-Brown Abbott (MBA) global listed infrastructure portfolio manager, said the fund had seen a strong uptick in flows since the latest round of interest rate cuts, now dating back a couple of years.
“Investors are seeking steady income,” Pike said. “Infrastructure will never by the most exciting asset class but, hopefully, it will always be stable with predictable and constant returns.”
During the 12 months to the end of October the unhedged verions of the MBA fund has returned about 20 per cent in NZ dollar terms, he said – well above its benchmark.
“Over the long term we expect infrastructure to deliver 5.5 per cent above inflation,” Pike said.
Since inception late in 2012, the MBA fund has returned 15.5 per cent against the benchmark (CPI plus 5.5 per cent) of 7.3 per cent.
According to MBA figures, the underlying yield of the listed infrastructure portfolio sits just above 4 per cent, indicating a large part of recent performance has been share price appreciation – along with share markets generally. The fund pays quarterly distributions.
Pike said the rising demand for infrastructure stocks – partly as a result of the low-rate environment – has been good for the asset class, which retains plenty of spare capacity.
“Infrastructure is a big space,” he said, “there should be more people investing in it.”
MBA, which recently scored a big institutional mandate from ANZ in NZ, roughly divides listed infrastructure into ‘risk-based’ assets such as pipelines and toll-roads and contractual arrangements like airports and utilities.
Currently, the MBA portfolio holds 27 stocks – mostly in the US – out of a potential, tightly-defined, global universe of about 110 firms.
“Attributes that we believe are important in infrastructure companies include a strong strategic position within the economy in which they operate, inflation protection, low volatility and a high level of corporate governance,” the MBA product disclosure statement says.
The mix of attributes has seen infrastructure emerge as a separate asset class over the last 20 years, differentiated from the broader stock market and other income-leaning sectors like listed property.
Typically, institutional investors with long-term horizons – for example, pension funds – allocate between 5 to 25 per cent to listed infrastructure, Pike said.
“If you can offer returns of 5.5 per cent above inflation through the economic cycle that’s quite a differentiator, especially when bond returns are so low,” he said.
Listed infrastructure has another distinguishing feature compared to its older cousin, the real estate investment trust (REIT) sector. Pike said specialist infrastructure managers own just 5 per cent of the stocks in their benchmark while REIT funds control the majority of companies in their respective indices.
Pete Morrissey, a long-time APN fund manager, said while the REIT market has been through some ups and downs, the core rent-collecting nature of commercial property remains attractive to income investors.
Prior to the GFC, the REIT market – especially in Australia – deviated from its rentier roots into more complex development and other fee-producing activities, often fueled by high leverage.
Post-crisis the REIT sector has largely cleaned up its act but there is still considerable diversity across the various operations, Morrissey said, with some firms weighted more to development, for instance.
“We focus on the daggy, simple side of the REIT business,” he said. “We look for stocks with consistent earnings that gain most of their income from owning quality commercial property and maximising the rental returns by retaining good, long-term tenants and keeping high occupancy rates.”
APN usually excludes REITs that earn anything above 30 per cent from non-rental activities, Morrissey said.
While APN keeps track of underlying real estate trends – such as the impact of online shopping on the retail market or the rise of high-tech industrial warehousing – it doesn’t follow a high turnover strategy.
“To a degree we allocate between sectors,” he said. “But we focus first on income and secondly on risk management.”
Currently, APN has four unlisted REIT funds managing a collective A$1.6 billion plus and two listed REITs holding a total of more than A$1 billion in assets: the company also offers six direct property funds.
In NZ, APN markets its flagship A-REIT fund in both Australian unit trust and portfolio investment entity (PIE) formats – the latter under the Implemented Investment Solutions fund-hosting banner. Morrissey said NZ investors have put about $90 million into the A-REIT products, of which $75 million remains in the Australian unit trust version.
He said APN is also considering launching another PIE next year, which could be either its Asian REIT (which has already attracted interest from NZ investors in the Australian unit trust) or a new global product that is currently in design phase.
Morrissey said the global fund, due to launch in 2020, would give APN investors exposure to the world’s biggest REIT market, the US, as well as the UK and Europe (in addition to the existing Asia-Pacific opportunities).
“In the current environment there is lots of demand for income,” he said. “Record low rates have brought commercial property into the limelight again. Real estate investors can access some capital security and income that – compared to the returns of bonds and term deposits – is becoming more attractive.
“To a degree, that creates a tailwind for us.”