Real estate funds have flourished over the past few years, supported by low interest rates and a slow but steady global economy.
Incremental demand and limited supply helped push occupancy rates up, which in turn drove rental rates higher. As a result, the real estate sector saw large inflows of investor money from sovereign wealth funds and Asian capital, according to research from UBS Asset Managment.
Despite positive indicators, investors were held back by the US Federal Reserve decision on interest rates. Now that the September rate hike has been postponed, real estate funds could get a short-term boost.
Against this backdrop, Fund Selector Asia compares the Franklin Global Real Estate Fund and the JPM Global Property Income Fund.
While both funds target global real estate, there is a significant difference in their investment approach. Luke Ng, senior vice president at FE Advisory, has provided a comparative analysis.
Investment strategy review
The Franklin Global Real Estate Fund, a mutual fund headed by Wilson Magee, has assigned the FTSE EPRA/NAREIT Global Real Estate Index Series as its benchmark. Under normal circumstances, the positions in the fund do not deviate from that of the benchmark.
In contrast, the JPM Global Property Income Fund, co-managed by Kay Herr and Jason Ko, does not have an assigned benchmark. This difference can be quite attractive for an investor who is actively looking for outperformance among the real estate class.
From a holdings perspective, the Franklin fund intends to invest in 50 to 100 securities, lower than that of about 300 constituents in the relevant index. Over the past year, the Franklin fund has consistently held around 100 securities.
The JPMorgan Fund also has a similar target, but the number of its holdings trend towards 60 securities.
The Franklin vehicle has a stronger focus on the Asian economies of Japan and Hong Kong, while the JPMorgan fund is tilted towards the US.
Moving forward, the correlation of the two funds is less likely to diverge because valuations of the underlying securities have been at a similar range, Ng said.
The top ten holdings of the two funds differ, as seen in the portfolio allocation table (as of 31 July, 2015):
In cumulative performance, over several periods, the Franklin vehicle has tended to underperform against its benchmark index and the JPMorgan fund:
Source: Franklin Templeton Investments, JP Morgan AM. *The JP Morgan fund does not use a benchmark
A look at calendar year performance:
Discrete performance data for Aug-Aug. Source: Franklin Templeton factsheet; For JP Morgan data, FE. Table has been updated from the previous version to reflect perfromance for the Franklin fund's primary share class.
In the past, positions in the Franklin fund have been close to that of the underlying benchmark. Given the high correlation, the fund should deliver returns which are close to the market in general,” Ng said.
Source: Franklin Templeton Investments, JP Morgan AM