A common belief that has popped up in the last few years is that everyone should allocate a lot of money to REITs. There are some that advise 10-20% to REITs as being appropriate.The 10-20% idea has never made sense to me. I have been writing about maintaining a moderate allocation for a long time.
The context here would be pretty much every type of REIT except mortgage REITs which I have never liked and timber REITs which rightly or wrongly I view as different. Am I am talking about malls, storage, office parks, warehouses, apartments and the like.
This chart reveals that domestic REITs have had a miserable few months, foreign REITs have struggled a little while the S&P 500 nets out flat. Folks who listened to the 10-20% crowd are either lagging badly or have had to be very right elsewhere in their portfolios.
I think this is analogous to putting 20% into commodities, all the studies saying this is a good idea notwithstanding.
I am a huge fan of REITs and have been for a while but believe in a moderate allocation. Clearly interest rates going up is not a good thing but I would not have thought they would have dropped by this much but only having one REIT at about a 3% weight (maybe a touch less now) means I didn't have to be right about the magnitude of the decline. The one REIT I use across the board is down 20 something percent and while that is a bummer (recurring theme here) there has been no real damage done overall.
One reason I don't load up that REITs have almost no presence in the S&P 500 (I scanned the list down to SLM corp and didn't see any) so the way I view things adding a few percent can add some value but adding too much amounts to a big bet.
The other thing is that with rates coming off all time lows and still being historically low it hasn't been a great place to be heavy. For anyone with no exposure it might be a good time to add a little. Prices are down 25% and while I have no idea if they will go lower they are a lot cheaper than when Sam Zell sold Equity Office.
14 comments:
Roger,
You have a selective, and very short memory. Foreign and domestic real estate has been on a huge tear for 4 years, and has only recently given back a small portion of those bigs gains.
You may have avoided the recent weakness by being underweight, but you sure missed a huge run up. No pain, no gain.
Roger, now that more commodities are in Backwardation (especially oil), do you expect commodities indexes to have improved positive performance due to the rolling yield?
XA
huge? it has mostly been better than the S&P yes but pales mightily in comparison to emerging markets which I have been and still am heavier in than REITs.
I don't think I missed anything I picked it up, more actually, else where.
XA, the short answer is yes but the longer answer is that I am not sure I would be the one to predict contango to backwardation and contango again cycle that will matter for these funds.
The USO people have a fund in the works that goes longer out that could solve the problem. At least that is what they hope.
There are some that advise 10-20% to REITs as being appropriate.
The 10-20% idea has never made sense to me. I have been writing about maintaining a moderate allocation for a long time.
Folks who listened to the 10-20% crowd are either lagging badly or have had to be very right elsewhere in their portfolios.
I think this is analogous to putting 20% into commodities, all the studies saying this is a good idea notwithstanding.
I have to respectfully disagree here. I don't buy into the entire efficient portfolio concept lock, stock, and barrel, but all the studies (see Ibbotson) support the idea of a 10 to 20% REIT allocation based on historical returns and correlation to U.S. equities.
Your comment about lagging badly certainly doesn't present the entire truth here. What were the returns for the REIT index in 2004, 2005, 2006? How do those compare to the S&P 500 for those 3 years? Anybody listening to the 10-20% crowd was laughing all the way to the bank the last 3 years, and would still be showing cumulative outperformance relative to the S&P 500 even after the decline this year.
In fact, REITs have been one of the best performing asset classes since the equity bear started in 2000. Anybody with a 20% REIT allocation had something working very well during the 2000-2002 bear market, and a major contributor to strong returns over the past 7 years.
FWIW, I've had a roughly 15% exposure to REITs for myself and clients the past 3+ years, and it is one of the major sources of my outperformance relative to the S&P 500.
I sold my REIT position down to 3% on 5/31/07 due to a combination of valuation concerns and technical price deterioration so I escaped most of the recent decline.
I think we are just going to have to agree to disagree here, but I strongly believe in a core strategic allocation to REITs and commodities of 20 to 40% (split between the 2). The Ibbotson asset allocation research clearly supports this. I also believe though in making tactical adjustments when conditions warrant.
I'm not sure what your emerging markets position size is, but unless I am missing something, emerging markets seem a helluva lot riskier to me then either a diversified group of REITs or diversified commodity index. I can't say for sure but I doubt either REITs or commodities have ever had the magnitude of drawdown emerging did in the late 90s.
Roger, As a retiree I have had a 20% allocation to NON TRADED public REITS such as HINES, CNL, WELLS, CB RICHARD Ellis, etc. I know they have gotten a lot of bad press but I've averaged over 7% net net over the last 5 years and I view them as a souped up BOND rather than as an equity. The share price has never dropped and several were bought out at substantial profit to me. For a retiree, they work as part of the fixed income portfolio to provide steady income and some potential for capital gains when they mature or sell out. Just one retirees opinion...
FWIW, performance comparison chart of REIT index versus S&P 500:
http://stockcharts.com/charts/performance/perf.html?$RMZ,$SPX
Note: I believe stockcharts is price performance only, no reinvested dividends
2000 to present (recent REIT decline included):
REITs +215%
S&P 500 flat
2003 to present
REITs +120%
S&P 500 +70%
2007 YTD
REITs -13%
S&P 500 +3%
I don't know. Everybody's style and preferences vary, but in terms of leading and lagging, outperforming and underperforming, my preference would be to focus more on multi-year performance (2 years, 3 years, 5 years, etc.), and not worry about 3 months, 6 months.
Mike C,
You might be right about all of it. The way I view it is white papers and the like help teach but rightly or wrong I simply don't buy into them as something to follow.
Re emerging versus REITs. As I read your comment I think you are using the word risk where I would use the word volatility.
I have felt there has been more risk to REITs over the last couple of years but more potential for volatility with emerging.
I don't have all the answers but I have felt the chance of higher rates, which I have been too early on has created a bigger threat to REITs than anything that confronts emerging markets. All that said I am equal weight EM because of the huge run they have had.
The did great in the beginning of the decade because rates were going lower. As the rate cycle matured and turned up that threatens them, IMO.
Dap on the REIT sale, you missed this last puke down.
Private REITs, in a way, are like annuities. They seem expensive to me but the people who use them absolutely swear by them, I can't argue with that.
Re emerging versus REITs. As I read your comment I think you are using the word risk where I would use the word volatility.
I have felt there has been more risk to REITs over the last couple of years but more potential for volatility with emerging.
Yes, I know what you mean, and I think we are on the same page with this one. Emerging tends to be more volatile on a shorter-term basis, but certainly there was more valuation risk in REITs the last year or two.
To be honest, I first started getting concerned with REIT valuations in 2005, and that was my first trimming of the position (small reduction), but my thought was as long as the trend was up, I would stick with the ride.
FWIW, Jeremy Grantham of GMO who I consider probably the best in the business at asset allocation and long-term asset class forecasts, likes emerging right now better then REITs although in his latest quarterly letter he implies he is getting ready to pull the plug on emerging soon.
Dap on the REIT sale, you missed this last puke down.
Thanks, it was really just executing on my plan. There is one thing that I am in EMPHATIC agreement with you on that I think few if any individual investors have, and that is having a strict, pre-defined plan so you don't get caught up in the emotion of the moment.
With REITs, I already knew valuations were stretched, and they were most likely overvalued, and then there was the classic technical deterioration. They started to underperform on a relative basis, and you had what looked to me like the classic head and shoulders top (like the S&P 500 in 2000), and a clear break of the 200 DMA. Put all that together, and it was time to head out of town. There was a sucker's rally the last few days of May when one of the bigger REITs got bought out. That was the perfect opportunity to get out.
Now the big question I face is when to boost my REIT allocation back up. Valuations have gotten better, but still are not great, and I want to see some clear technical signs of stabilization.
Been a big fan of REITs for years -- good yields usually (some non-taxable as ROC), some growth potential, lower correlation to stocks and bonds, access to real assets including international, all that good stuff -- but have always thought the statutory requirement that they disburse at least 90% of taxable income to shareholders carried the potential for problems when the need for a cash cushion was greatest: Panic asset runs.
Speaking of international, very useful article and chart at http://tinyurl.com/2nusjx for those working to avoid country overlap in international index investments
Okay, time to pop another Dramamine and get back to some trading: I'm shifting gears in my tactical mix a fair bit except for shorts like WCI which I am riding all the way down (wish I'd been smart enough to get into AHM before it became impossible to borrow any shares); no strategic changes though, like to avoid whipsaws if possible.
Huge? Yes, huge.
Last year alone, foreign reits were up 80+%. Check out RWF.
But, I guess you forgot to mention that Rog.
The market price for RWF was up 60% in 2006 according to this chart. The NAV was up just under 30%, about the same as EEM.
RWF got its 60% thanks to a huge surge in premium going into the EOP saga.
Guess you forgot to mention that?
oops, this chart.
roger,
don't forget to count dividends.
its up 80%
Why does your site have a picture of Neil Cavuto eating what looks like an ice cream cone?
I am just getting back into REITs after bailing in June. They'll be about 5-6% of my port.
Big Steve
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