PGIM AMC has launched a New Fund Offer (NFO) for PGIM India Global Select Real Estate Securities fund. This fund will be a Fund of Fund (FoF) that invests in an overseas fund that invests in REITs. This fund is going to be the second such feeder REIT fund in India. Kotak AMC already has one.
What is a REIT?
A real estate investment trust or REIT is a company that invests in commercial and residential property. REITs are usually listed in the stock exchange like any other stock. The primary source of income for the REIT is the rent paid by the tenants of these properties. REITs have a favourable tax status in many countries that pass on a large portion of this rent to the REIT shareholders as a dividend. Investors looking at high yields from stocks as dividends consider REITs as a part of their portfolios. A REIT can invest in one or more real estate types like residential, commercial (office buildings, malls) and senior living facilities, hotels, data centres, and warehouses across various locations.
What is a REIT mutual fund?
A REIT mutual fund invests primarily in REITs. Depending on the fund’s mandate, it may or may not pass through the dividends from the REIT to the fund’s unit-holders.
A REIT mutual fund offers a regulated exposure to the Real Estate asset class via professional maintenance, small ticket sizes, liquidity to enter/exit at any time and diversification for a stock/bond portfolio. All of these considerations alleviate the issues with direct real estate investing. Direct investing has high ticket sizes, illiquidity, possibly dubious promoters in commercial real estate deals and the requirement to manage the property by the investor themselves.
What is the fund?
The fund is an FoF that will invest in PGIM Select Real Estate Fund, a Luxembourg based REIT mutual fund. The underlying fund has a 1.05% TER (minimum value, based on the share class). The FoF will have its expense ratio on top of that, which will be a considerable drag on returns.
The REIT mutual fund invests in REITs listed in multiple regions to give exposure to real estate worldwide. Since the FoF does not exist at the time of writing, the entire analysis below is regarding the REIT mutual fund.
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Details of the portfolio of the REIT mutual fund
As the portfolio shows, this is a sector fund with a heavy allocation to US-listed REITs. The underlying portfolio of the REITs is heavily overweight on Residential and Industrial real estate.
The FTSE EPRA Nareit Global Real Estate Index Series is designed to represent general trends in eligible real estate equities worldwide. Relevant activities are defined as the ownership, trading and development of income-producing real estate.
Past performance
We use market data from 01-Aug-2014 (the date of inception of the REIT MF) till 17-Nov-2021 for the price analysis below. In addition, to provide the perspective of REITs vs stocks, we also add the MSCI World USD price index data.
Point-to-point returns
Period
RE Fund
RE Index
Global Stocks
6m
10.76%
10.79%
8.03%
1yr
35.37%
39.67%
38.46%
2yr CAGR
8.58%
0.02%
19.22%
3yr CAGR
14.58%
5.86%
16.23%
5yr CAGR
9.22%
2.89%
13.43%
Since Inception (08/14)
6.20%
4.73%
8.77%
Correlation with RE Index
83%
100%
61%
We see that the performance relative to global stocks has been comparable only in the recent past (<1 year). Still, overall, the returns have been relatively poor. The correlation figure shows some potential risk reduction by combining with a stock portfolio, which we will deal with in a future post.
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Rolling returns and risk
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We see that the price movement of the REIT MF has alternatively lagged and outperformed global stocks with a predictable higher fall in 2020 due to COVID lockdown affecting the real estate sector. We can also see a decent alpha vs the index, meaning that the fund manager’s active decisions have generally paid off, especially in the COVID period (see the red line mainly being one under Alpha vs RE Index). Risk for this asset class has been consistently higher than stocks in this period (the green line under one-year rolling risk is mostly 0).
Suppose we combine the two metrics by dividing the return by the risk. In that case, we get more conclusive evidence using risk-adjusted returns.
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As the chart shows, the risk-adjusted return favours the active investment decisions taken by the fund manager reasonably consistently. However, the risk-adjusted return mostly is lower than stocks in this period.
Investors should note that this review does not discuss combining a REIT fund with a stock portfolio and rebalancing to improve return/risk that we will deal with in a future post.
Investors, using the charts above, should note that this fund has considerable active risk. This risk has so far led to higher returns relative to the benchmark index. Still, investors should be mindful of the trend reversing.
Investors should also remember that fund returns will be impacted by the Rupee’s performance vs foreign currencies. Depreciation of the Rupee vs the currencies in which the REIT MF price is denominated will improve returns.
Who should invest in this fund?
The standard recommendation regarding NFO investment is
invest only if there is a niche that existing funds do not serve
wait until the NFO is over and the fund opens for the standard subscription so that the fund expenses are known
at least a few months of NAV history is available so that tracking error and alpha can be estimated given the FX risk involved in a feeder fund
An investor may consider this FoF under the following circumstances
they wish to take exposure to real estate as an asset class via REITs
they understand that, unlike actual REITs, there will not be any regular dividend payout
they understand the taxation of international funds
they have the necessary risk appetite to include this fund as a part of a satellite portfolio and are willing to take a significant exposure in percentage terms
FAQs on NFO investing
NAV of ₹10 is a benefit
NAV of a mutual fund is calculated as (fund assets - expenses)/Units.
For an NFO, the number of units issued is adjusted to ₹10.00 as a convention. It does not mean that the NFO is offering stocks cheaply. Two funds with the same assets and expenses will give the same return irrespective of their NAV values.
NFO is a unique investment opportunity
Unlike a stock IPO, where listing gains (and losses) are possible, NFOs do not offer a new opportunity all the time. Given that there are 44+ AMCs in India, it is highly likely that a similar fund already exists and has a credible track record.
Thematic or certain international funds are sometimes an exception to this rule. Investors can evaluate if they need the unique exposure in their portfolio on a case by case basis.
Apart from these, investors should refer to this post to avoid some common mistakes while investing in mutual funds.
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This post titled Should you invest in PGIM Real Estate fund NFO? first appeared on 18 Nov 2021 at https://arthgyaan.com
