Since hitting lows in October 2023 A-REITs are on a run and up nearly 33% in the last driven by the largest Australian REIT Goodman Group GMG which is up just over 60%. For investors looking to get exposure to the listed property sector Vanguard Australian Properties Securities VAP is an excellent passive vehicle. The strategy maintains its top ranking in the Australia real estate Morningstar Category and charges a fee of 0.23%.

This strategy tracks the S&P/ASX 300 A-REIT Index, reflecting the narrow Australian REIT market with less than 50 listings on the Australian Securities Exchange as of September 2024. Given the limited playing field, few active strategies are able to differentiate themselves and outperform the benchmark, thereby making the appeal of passive strategies strong in this market segment. Of the listed A-REIT universe, the index consists of 31 constituents, with a market-cap coverage of over 95% as of September 2024.

The index provides a reasonable subsector diversification relative to other sector indexes, but it does carry a fair degree of stock-level concentration. As of September 2024, the top 10 holdings accounted for more than 80% of the portfolio assets. Given the portfolio concentration, a corporate action or firm exiting the underlying index could cause notable portfolio shifts. The strategy’s passive nature does not explicitly offer any downside protection in such events. That said, even active strategies are unable to offset the concentration risk meaningfully as they do not stray far from the index, leading to narrow levels of return dispersion within the category. This further boosts the appeal of passive strategies.

VAP

The strategy’s low management fee makes the overall holding cost of the strategy very attractive. Its scale is advantageous for trading efficiencies and cash flow management. The strategy continues to earn our highest conviction based on the merits of the index with Vanguard’s legacy and scale.

Investment process

The portfolio typically holds all index constituents, but slight deviations are allowed to minimize trading costs. Index rebalancing occurs semiannually. Index changes are infrequent, but in a concentrated sector such as Australian property, they can be lumpy with the corporate actions of large companies. Being part of one of the largest asset managers in the world, the investment team has access to a deep bench of investment and operational personnel locally and offshore equipped with sophisticated systems. This aspect helps Vanguard minimize the tracking error with the index, besides keeping a lid on tracking and operational costs. Vanguard operates a conservative securities-lending program with a well-designed framework. All securities-lending proceeds are returned to the fund, which benefits the investors directly.

The fund mirrors the composition of the S&P/ASX 300 A-REIT Index, which contains only 31 names as of September 2024. The Australian REIT market is smaller in scale and size than other developed markets (like the United States). Despite the limited number of stocks, the index is well representative of the opportunity set, with approximately 97% coverage of the free-float-adjusted market capitalization of the sector. Owing to the smaller market, the portfolio’s overall characteristics align with the category average as active managers do not stray far from the benchmark weightings. A few minor distinctions exist that contribute to the long-term outperformance on a risk-adjusted basis. The strategy’s average market-cap exposure is higher than the category average, which leads to a lower-volatility profile. Subsector exposure is relatively well-diversified, with approximately one third of the portfolio invested in diversified REITs, while around 50% of the assets is split across industrial and retail REITs.

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