Prudential fund manager Marc Halle on how real estate fits into portfolios
Sourced through Scoop.it from: www.investmentnews.com
REITs are an odd beast: They can follow the ups and downs of the stock market and invest in non-liquid assets at the same time. In principle, they are great portfolio diversifiers, though over the past years, they have been more correlated with the stock market. In fact, this correlation has fluctuated over time, sometimes more or less correlated. Knowing that REITs regularly distribute dividends and have the valuation of their underlying assets as reference, we should anticipate less volatility and correlation in the long run. Thus, they are an attractive asset class for diversifying investment portfolios.
One very important aspect of REITs is that they are required by law to pay 90% of their taxable income. Failure to do so always begs the question of why not. Such also happens, in a minor degree, when REITs lower the dividend rate — like there is something wrong with it. There is no more real proof that a REIT is delivering value than when they pay shareholders their profits in cash — a “show-me-the-money” type of thing. That is why dividends with equal or increasing amounts paid regularly are viewed as an indication of financial health.
Lately, investment sentiment has been against REITs. Since many in the market view them as bond substitutes, they are more sensitive to fluctuations in interest rate moves. Indeed, REITs tend to hold up well in times of inflation, when interest rates are increasing. The federal government (and all of us) wishes our economy were less lukewarm and more accelerated, but when inflation happens, it comes into play. REITs are then well-positioned to protect an investment.