Industry Research and Whitepapers

REIT share prices, like the broader stock market, have been sensitive to changes in the outlook for interest rates, including both the short-term rates set by the Federal Reserve and the long-term rates that are governed more by market forces. Rising interest rates have been identified by some analysts as explaining the disappointing REIT stock performance during January and February. In fact, some analyses suggest that negative announcement effects on REITs associated with rising interest rates have become more pronounced since 2013. Recent performance, however, has been in contrast to earlier periods when REIT share prices generally performed quite well during periods of rising interest rates….

Real Estate Investment Trusts (REITs), and other listed real estate securities, are equities. They are listed on stock exchanges and included in equity indices such as the S&P500, the Russell 1000 and the FTSE 250. Some investors are put off by this. They prefer to try to build their real estate portfolios by investing privately and directly in bricks and mortar. In this paper, we want to challenge and alleviate those concerns. We argue that listed real estate securities are fast becoming the only efficient way to build a truly global, diversified exposure to the asset class, and that returns have historically diverged quite quickly from those of the broad equity market, reflecting the performance of the underlying real estate assets. Moreover, we observe that listed securities offer a level of liquidity that is simply unavailable from direct real estate or even real estate open-ended funds. We believe the resulting short-term correlation with equity market volatility should be regarded as a source of opportunity to invest in genuine real estate returns at sometimes deep discounts…

Many investors associate REITs with interest-rate risk.  As an income-oriented sector, REITs can be negatively affected by interest-rate increases in a similar vein to fixed income.  As interest rates rise, all else being equal, the income produced by REITs at the current stock price is worth less, and so prices generally fall in order to increase the yield of those stocks relative to other income producing instruments.

Note the qualifier “all else being equal.”  For fixed income, this interest-rate risk is especially pernicious, because the coupon for a bond ( i.e. the income) is fixed at the time of issuance. Thus, as rates rise, the price of the bond must fall in lock step.  However, for income-producing stocks, including REITs, the income (i.e. dividends) is not fixed, and, in fact, may rise with improvements in economic fundamentals (which often coincide with interest-rate increases)…

I am a firm believer in stock picking.

I think stock picking, with the right process and the right temperament, works. Stock pickers, at least the ones I track, in the long run tend to outperform.

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So, is active management doomed? I do not believe so. The more investors use ETFs and robo-advisers, the larger the mispricing of individual securities and the larger the opportunities for active managers – such as value investors – to outperform…

Still concerned about REIT performance amid rising interest rates? Just look at the facts: REITs have historically delivered strong returns when the Federal Reserve increases rates, as this typically happens when the economy is getting stronger.

After increases in the fed funds rate, REITs have historically outgained stocks by nearly 8% on average over the following year…

According to research by investment research firm Morningstar, there is very good evidence that in the United States the more money a manager has invested in the funds he runs, the better those funds perform. Funds that are run by managers with no co-investment perform meaningfully worse. It isn’t hard to figure out why…

Are markets efficient? Do stock prices discount all publicly available information, correctly and accurately? Is the only way to earn higher returns to take higher risk? It all depends who you ask. Academics who study and teach modern portfolio theory will say, “Of course markets are efficient.” But practitioners who put their money where their mouths are and make a living this way, they will say, “Of course markets are not efficient.”

If you side with academics, you must invest in index funds, and if you side with practitioners, you should invest in stock pickers and actively managed portfolios managed by portfolio managers who aspire to beat the index.

But are academics that different from, say, value investors? In fact, they are not. They both believe that markets are efficient in the long run. Where they disagree is whether the market is efficient in the short run. And if you look at it this way, one cannot seriously think that markets are efficient in the shorter term…