Updating the ‘total return quilt’

Revisiting REITs and interest rates 5 It is interesting to note that the past 20 years, when interest rates have mostly declined and central banks have employed significant levels of quantitative easing, PE change has not accounted for much total return at all. Rather, earnings growth and dividend yield has accounted for the lion’s share of returns over the past twenty, fifty, hundred years. In equities – and in REITs, no less – the key to explaining returns lies in company earnings. Conclusion As markets continue to navigate the risks of COVID and a potential vaccine, investors are rightly beginning to focus on the risks associated with the massive stimulus put in place during 2020. One of these risks is inflation and the potential for higher interest rates. But, despite a long-held belief that interest rates influence REIT total returns, there has been a total breakdown in the correlation between REITs and the US 10-year bond yield this year. While there are indeed short periods where correlation is high, over the long term there is no relationship between REIT returns and interest rates. At Quay, we have found replacement cost and earnings growth have explained REIT returns far better. This makes sense, given REITs are nothing more than real estate businesses operating in a commodity market. With this in mind, we believe it is a better use of REIT investors’ time forming a view on earnings, rather than interest rates. While we have top-down opinions, it is our bottom-up research process that matters. For more insights from Quay Global Investors, visit quaygi.com The content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. The commentary in this article in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. This information is issued by Bennelong Funds Management Ltd (ABN 39 111 214 085, AFSL 296806) (BFML) in relation to the Quay Global Real Estate Fund. The Fund is managed by Quay Global Investors, a Bennelong boutique. This is general information only, and does not constitute financial, tax or legal advice or an offer or solicitation to subscribe for units in any fund of which BFML is the Trustee or Responsible Entity (Bennelong Fund). This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on the information or deciding whether to acquire or hold a product, you should consider the appropriateness of the information based on your own objectives, financial situation or needs or consult a professional adviser. You should also consider the relevant Information Memorandum (IM) and or Product Disclosure Statement (PDS) which is available on the BFML website, bennelongfunds.com, or by phoning 1800 895 388 (AU) or 0800 442 304 (NZ). BFML may receive management and or performance fees from the Bennelong Funds, details of which are also set out in the current IM and or PDS. BFML and the Bennelong Funds, their affiliates and associates accept no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. All investments carry risks. There can be no assurance that any Bennelong Fund will achieve its targeted rate of return and no guarantee against loss resulting from an investment in any Bennelong Fund. Past fund performance is not indicative of future performance. Information is current as at the date of this document. Quay Global Investors Pty Ltd (ABN 98 163 911 859) is a Corporate Authorised Representative of BFML.