The fund invests in a feeder fund for the ARA Asian asset income fund and will target an initial yield of 7-8 per cent a year. The underlying master fund invests in listed and unlisted asset backed Asian securities that have the potential for growing rental income and capital growth. As well as property assets, the portfolio may include utilities and infrastructure assets such as power distribution and road networks.
The master fund’s portfolio comprises two parts. A core portfolio initially investing in three Asian Reits and an Australian utility infrastructure group will make up 60 per cent of the fund. The remainder will go into non-core utilities and infrastructure securities.
Property fund manager ARA Group, which was founded in 2002, runs the master fund. It aims to invest in businesses with transparent cash flow and income streams that underpinned by factors such as long-term leases or, in the case of utilities companies, a near monopoly. It will also look for certainty of cash flow and a commitment to high dividend payouts.
The fund may also take short positions on index derivatives but this will de done to manage risk and is not a core part of the investment strategy. The portfolio can be geared up to 15 per cent but this will be to meet redemptions and to enable the fund to make transactions, not to boost returns. However, the underlying master fund can borrow up to 100 per cent to enhance the investment, pay expenses and fund redemptions, but in practice the leverage is expected to be 40-50 per cent.
The fund could appeal to some investors as it allows exposure to the growing market for Asia-Pacific Reits and infrastructure/utility listed equities. Asian real estate is cheap relative to its growth potential and Asian property developers are under-researched by analysts which could throw up good investment opportunities.
However, the master and feeder fund structure is one potential downside. If there are several feeder funds investing in the master fund and one of them withdraws, operating costs may be higher for the feeder funds that remain and this could drag down the returns for investors.