How The BetaShares Legg Mason Real Income Fund (ASX:RINC) Has Outperformed The ASX 200

In a falling interest rate environment, one category of assets in particular tends to perform very well: real physical assets. Here’s how the BetaShares Legg Mason Real Income Fund (ASX: RINC) capitalises on that.

Unpacking The Real Income Fund

The BetaShares Legg Mason Real Income Fund is a collaboration between BetaShares and US fund manager Legg Mason.

The aim of the Fund is to provide a pre-tax income yield above the S&P/ASX 200 (INDEXASX: XJO) and to grow this income above the rate of inflation, which currently sits around 1.6%.

The RINC ETF is a managed fund which invests in a portfolio of ASX-listed companies that hold real physical assets such as real estate investment trusts (REITs), utilities and infrastructure.

For those unfamiliar, the Rask Finance video below explains managed funds:

At the end of August, the RINC ETF had 35 holdings including a cash allocation. More than half of the ETF (57%) is invested in a range of REITs including retail, diversified, office, and industrial. The remaining allocation is spread across utilities and infrastructure.

The RINC ETF’s top holdings include Aurizon Holdings Ltd (ASX: AZJ), Stockland Corporation Ltd (ASX: SGP), and APA Group (ASX: APA).

When interest rates fall, as they have been recently, the price of real assets typically increases because the cost of capital is reduced, as is the risk-free rate. As a result, the focus on real assets appears to be paying off. Over the last 12 months, the RINC ETF has returned 23.02% compared to the 12.41% return on the ASX 200. Since inception in February 2018, the fund has returned 19.07% per year versus 13.66% for the index.

While it is not the most reliable indicator, the comparable unlisted fund has returned 15.24% per year over the last five years.

The current 12-month trailing distribution yield is 4.3%, however, based on broker estimates and research from Legg Mason, the yield is expected to reach 5.3% per year. Of course, this is only an estimate.

Fees & Risks

The RINC ETF charges a management fee of 0.85% per year, which I would consider reasonable for an actively-managed ETF.

The portfolio is quite concentrated and only has a meaningful level of exposure to three broad industries, so an investor must put a lot of faith in the fund manager to be able to identify risks in those industries and protect the ETF.

While decreasing interest rates can have a positive effect on real asset prices, rising interest rates can have an inverse effect and would likely see the fund underperform the ASX 200 index.

It should also be noted that the RINC ETF only has a short-term track record, so it’s difficult to gauge what long-term performance may look like.

My Take

The RINC ETF has more than delivered on its objective over the last 12 months, outperforming the index return convincingly and providing a high and increasing dividend yield. However, this isn’t a free lunch. The higher returns are, at least to some extent, the result of taking on more risk than the index, so you may like to keep this in mind when making an investment decision.

If you’re looking for an option with a high dividend yield but less risk, you may want to consider our number one ETF pick in the free report.

Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.

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