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You might think CI First Asset Canadian REIT ETF (TSX: RIT), with its category-topping 10-year average annual compounded rate of return of 14.5% (as of May 31) and its low 0.75% management expense ratio (MER), is your typical passively-managed index proxy, in this case for the real estate sector and REITs in particular. You’d be wrong about most of it, except for the outperformance.
“We’re a fully actively managed ETF,” says Lee Goldman, senior portfolio manager with Signature Global Asset Management in Toronto, and manager (with Kate MacDonald and Josh Varghese) of the ETF in question. “We don’t use a benchmark, although we do refer to the S&P/TSX Capped REIT Index often to see how we’re performing.”
Adds MacDonald: “Not all ETFs are passively managed. We’re totally index-agnostic – there’s no difference between the way we manage the ETF and the way we manage mutual funds. We don’t own all the same names as the index, and we’re more diversified – the index has 18 names, for example, and we have 35. The index is all REITs, but we’re not – we hold other assets as well.”
Goldman describes their investment approach as top-down/bottom up, first looking at fundamental factors such as management teams, property characteristics and locations, balance sheets and valuations, then using a macro overlay to look at business/economic cycles and possibly political considerations. “Management is very important,” he notes. “We know the management of all the companies we own, we’ve met with them all.”
“Valuations are very important too,” Goldman adds. “We combine all those [bottom-up] factors, then we use a macro overlay to see where we are. And because Signature is [a large management company], we can take cues from some of the other funds.”
The result is a portfolio quite unlike the benchmark, with a current preponderance of residential property. “We’re tilted heavily into multi-family spaces,” says Goldman. “We’re overweight relative to the index in residential but also in industrial properties. And we’re very underweighted in retail,” he adds in a nod to the growing impact of on-line shopping.
Indeed, the ETF’s top two holdings – Halifax, NS-based Killam Apartment REIT (TSX: KMP.UNP), and Toronto-based Canadian Apartment Properties REIT (TSX: CAR.UN) – are obviously residential in focus, as are a few other names in the Top Ten. Both MacDonald and Goldman cite Canada’s tight rental markets as a major factor in this orientation.
“The Canadian rental market is very tight – nationally the vacancy rate is 3.3% -- so rents are going up,” says MacDonald. “We have a market where supply is virtually nil, and demand is very strong, both from tenants and from investors. Investor prices are trending higher because the supply is so limited.”
Goldman and MacDonald say the only workable solution for the tight market is to create more purpose-built rental housing, but they point to obstacles such as permitting/approval delays, rising land prices and other costs, and competition from condo developments. “[Rental prices] are still not at the level where they can compete with condos,” MacDonald says. “You’re looking at $225 to $250 per buildable foot. Meanwhile, costs keep going up. Rental rates are up, but companies are still operating on thin margins.”
Nevertheless, the margins for this ETF have been healthy since inception in 2004 (a 15-year average annual compound rate of return of 11%), and the managers don’t see circumstances changing substantially in the foreseeable future. “There is no near-term fix,” says MacDonald. “We need more housing, that’s clear, but sometimes governments enact policies that don’t help.”
As for that low MER, Goldman jokes that “they don’t pay us very much” before adding, “That’s the reality of where this industry has been going. But then we manage other funds as well, so our costs are allocated to a couple of funds.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
Notes and Disclaimers
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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