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30-04-2011, 07:26 AM
Business Times - 30 Apr 2011
SMART MONEY
Key points in choosing a trust to invest in
By GENEVIEVE CUA
REITS (real estate investment trusts) and business trusts may seem to be attractive options, particularly as upwardly trending inflation puts savers in an awkward and worrisome quandary of negative real interest rates.
The attractiveness of such trusts lie in their ability to pay a regular and stable dividend. This is a big plus in a portfolio. Research into long-term returns shows that reinvested dividends comprise the bulk of returns, compared to capital appreciation.
But before you take the plunge, you should, as always, examine the listed trusts in the context of your entire portfolio. If you are underinvested in equities, an allocation into such income-bearing instruments may be a prudent way to step up your risk exposure, and yet enhance your portfolio yield. If you are already adequately or even overexposed to equities, you may want to consider trimming some of your risk assets in favour of a more stable dividend-yielding instrument.
As Reits and business trusts offer exposure to a broad range of industries and types of assets, you should do your homework on the ones you may be keen on. Here are some key points to consider:
1) Your risk tolerance and investment horizon: Reits and business trusts are similar to bonds in that they generate an income stream, but they will be more volatile than bonds, and more highly correlated with stocks. You will also need to be prepared to hold them for a longer period to benefit from dividend payments.
2) Examine the underlying assets: Each Reit or business trust will offer exposure to a specific sector. Peruse the trust's website for relevant documents - their track record of dividends; statements on their operating environment; gearing levels and debt maturity profile.
How concentrated are the trust's assets? The assets, for instance, may depend heavily on tenants from a specific sector, which would make the trust vulnerable to a downturn in that sector. It would be prudent if the trust's assets are sufficiently diversified in terms of tenant mix, geography and industry exposure.
If it is a foreign Reit or business trust, you will need to be aware of the operating environment as well in the country, including regulatory or political risks. The macroeconomic environment will also impact their businesses. Ascertain, too, the trust's growth potential: is it able to make yield-accretive investments?
3) Be aware of factors relating to the trust's structure: One is the sponsor, if the trust has one. What is the sponsor's financial strength? Has the sponsor supported the trust on previous occasions when the trust needed help in financing, for instance? This may give an indication of the sponsor's willingness and ability to help should there be another financial crisis. In the recent crisis, a number of Reits resorted to raising capital through a rights issue. This may pose a financial strain on your resources.
The management of the trust is yet another important aspect. Ascertain the quality of management and its track record. How is management remunerated? Some trusts provide for remuneration by units to align the manager's interests with unitholders'.
4) Fees: Reits and business trusts levy a number of fees, including an annual management fee; performance fee; property management, acquisition and divestment fees. Might the fees incentivise managers to take on more debt? On performance fees, in particular, there is no uniform formula for the calculation, and the benchmark used to measure outperformance may also not be transparent. The prospectus will typically have an illustration of how the performance fee is charged.
5) Dividend payments: How frequently are dividends paid? There may be circumstances when dividends may be cut or suspended, such as when the trust is loss-making or when rental income has fallen.
SMART MONEY
Key points in choosing a trust to invest in
By GENEVIEVE CUA
REITS (real estate investment trusts) and business trusts may seem to be attractive options, particularly as upwardly trending inflation puts savers in an awkward and worrisome quandary of negative real interest rates.
The attractiveness of such trusts lie in their ability to pay a regular and stable dividend. This is a big plus in a portfolio. Research into long-term returns shows that reinvested dividends comprise the bulk of returns, compared to capital appreciation.
But before you take the plunge, you should, as always, examine the listed trusts in the context of your entire portfolio. If you are underinvested in equities, an allocation into such income-bearing instruments may be a prudent way to step up your risk exposure, and yet enhance your portfolio yield. If you are already adequately or even overexposed to equities, you may want to consider trimming some of your risk assets in favour of a more stable dividend-yielding instrument.
As Reits and business trusts offer exposure to a broad range of industries and types of assets, you should do your homework on the ones you may be keen on. Here are some key points to consider:
1) Your risk tolerance and investment horizon: Reits and business trusts are similar to bonds in that they generate an income stream, but they will be more volatile than bonds, and more highly correlated with stocks. You will also need to be prepared to hold them for a longer period to benefit from dividend payments.
2) Examine the underlying assets: Each Reit or business trust will offer exposure to a specific sector. Peruse the trust's website for relevant documents - their track record of dividends; statements on their operating environment; gearing levels and debt maturity profile.
How concentrated are the trust's assets? The assets, for instance, may depend heavily on tenants from a specific sector, which would make the trust vulnerable to a downturn in that sector. It would be prudent if the trust's assets are sufficiently diversified in terms of tenant mix, geography and industry exposure.
If it is a foreign Reit or business trust, you will need to be aware of the operating environment as well in the country, including regulatory or political risks. The macroeconomic environment will also impact their businesses. Ascertain, too, the trust's growth potential: is it able to make yield-accretive investments?
3) Be aware of factors relating to the trust's structure: One is the sponsor, if the trust has one. What is the sponsor's financial strength? Has the sponsor supported the trust on previous occasions when the trust needed help in financing, for instance? This may give an indication of the sponsor's willingness and ability to help should there be another financial crisis. In the recent crisis, a number of Reits resorted to raising capital through a rights issue. This may pose a financial strain on your resources.
The management of the trust is yet another important aspect. Ascertain the quality of management and its track record. How is management remunerated? Some trusts provide for remuneration by units to align the manager's interests with unitholders'.
4) Fees: Reits and business trusts levy a number of fees, including an annual management fee; performance fee; property management, acquisition and divestment fees. Might the fees incentivise managers to take on more debt? On performance fees, in particular, there is no uniform formula for the calculation, and the benchmark used to measure outperformance may also not be transparent. The prospectus will typically have an illustration of how the performance fee is charged.
5) Dividend payments: How frequently are dividends paid? There may be circumstances when dividends may be cut or suspended, such as when the trust is loss-making or when rental income has fallen.
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