Safety-First Fund Manager Beats 99% of Peers by Catching a Boom

  • Legg Mason's Ashton Reid won big on Aussie property, utilities
  • Defensive fund still outperformed as markets tumbled this year

Over in Australia, a fund that prides itself on safe returns in all kinds of economic weather is showing up the nation’s best stock pickers.

Ashton Reid’s fund invests about half its assets in property trusts and the rest in utility shares and listed infrastructure. The stated strategy is to seek inflation-protected income -- and lower volatility -- from a set of quality holdings. In a sense, it couldn’t sound any duller.

But despite its defensive approach, Legg Mason Inc.’s real income fund has beaten 99 percent of peers in what was mostly a bull market over the past five years. While that’s largely down to being on the right side of an unprecedented boom in real estate, the fund has continued to outperform even as markets fall.

“Australia’s had good fundamentals for the type of investments we have,” Reid, 46, said in a phone interview from Melbourne. “You’re getting your income, you’ve got your underlying growth that comes from the assets” and there are trading opportunities, he said.

Reid’s fund, which began in December 2010, returned 126 percent over the past five years, Bloomberg data show, about four times the level of the benchmark S&P/ASX 200 stock index, including reinvested dividends. It placed second in a Morningstar Inc. ranking of 486 Australian large-cap equity funds over five years through 2015.

Real Estate

The A$263 million ($193 million) fund had 52 percent of assets in real-estate investment trusts at the end of January, 38 percent in utilities and the rest in infrastructure. The fund, which typically has from 25 to 35 securities, targets volatility about 20 percent lower than the S&P/ASX 200 and income levels that will rise with inflation as underlying investments increase their revenue.

While the fund’s main goal is to provide stable income, it’s also seen strong gains on its investments. Indexes of Australian REITs and utilities have both jumped about 60 percent since the fund’s inception, against a 7 percent gain for the benchmark equity gauge. Investors poured into the nation’s real-estate market, dominating it like never before for most of the fund’s existence, spurred by low borrowing costs and rising prices.

Then, as share markets tumbled this year, Reid exploited the flight to safety. The 20-year Legg Mason veteran trimmed his position in Vicinity Centres, which owns shopping malls across Australia, as the stock price climbed. He also reduced his holding in AGL Energy Ltd., a gas and electricity supplier.

“You get equity buyers coming into the sectors we own when there’s heightened risk aversion,” said Reid, who competes in ironman triathlons in his spare time. “They’ll almost buy real assets at any price.”

The fund has returned 1.7 percent this year, compared with a 3.8 percent decline for the benchmark stock gauge. Shares of property group Stockland and Vicinity Centres, two of his largest holdings that make up about 15 percent of the fund, climbed 3.1 percent and 11 percent, respectively. The ASX 200 Index rose 0.2 percent Friday.

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The jury is out on how long the good times can continue for Australian property. Central bank Governor Glenn Stevens in June described Sydney’s housing market as “crazy.” Jonathan Tepper, chief executive officer at research firm Variant Perception, predicts a 30 percent to 50 percent crash as homeowners fail on debt repayments.

Even if that happens, Reid will still have his income. The fund says it expects to provide a dividend yield of 6.4 percent over the next 12 months.

“We’re trying to deliver a growing income stream, looking at where the dividends can be on a sustainable basis,” he said. We want to own “companies with much lower exposure to the economic cycle.”

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