In 1972 equity REITS had a 0.63 correlation to Small-Cap US stocks, according to Ibbotson. This has now declined to 0.26 from 1993.
Can anyone cite reasons for this steady decline over the years?
Press release with the Ibbotson data table comparion on page 3
http://www.nareit.com/mediaresources/IbbotsonFinal.pdf
Petey
Declining equity REIT correlation to Small-Cap Eq. Why?
-
- **** Heavy Hitter
- Posts: 525
- Joined: Tue Nov 26, 2002 6:46 am
Berstein article
Falling REIT correlations:
http://www.efficientfrontier.com/ef/498/reit.htm
In the REIT ETF arena, I'd lean towards the index like ETF's, namely the Wilshire REIT index. While the Vanguard REIT index uses the Morgan Stanley REIT index (which only encompasses 2/3 of the U.S. REIT market), the Wilshire REIT index encompasses the entire U.S. REIT market. Also, the index ETF minimizes manager risk.
Alec
http://www.efficientfrontier.com/ef/498/reit.htm
In the REIT ETF arena, I'd lean towards the index like ETF's, namely the Wilshire REIT index. While the Vanguard REIT index uses the Morgan Stanley REIT index (which only encompasses 2/3 of the U.S. REIT market), the Wilshire REIT index encompasses the entire U.S. REIT market. Also, the index ETF minimizes manager risk.
Alec
-
- **** Heavy Hitter
- Posts: 525
- Joined: Tue Nov 26, 2002 6:46 am
Re: Berstein article
Hi Alec,
Thanks for the link.
Bernstein really sounds quite negative on REITS, suggesting they are not as well managed as in the past. I was also unclear at the end of the article whether other than saying anything above NAV is inflated, sometimes dividends at 5% and other times 7%, which was indicating relative overvaluation? Surely NAV tells you that more.
Petey
Who offers the Wilshire REIT? Where can I find more information about it other than at Wilshire.com? Do you have any thoughts on the Cohen & Steers Realty REIT, their index REIT?
Petey
Thanks for the link.
Bernstein really sounds quite negative on REITS, suggesting they are not as well managed as in the past. I was also unclear at the end of the article whether other than saying anything above NAV is inflated, sometimes dividends at 5% and other times 7%, which was indicating relative overvaluation? Surely NAV tells you that more.
Petey
Who offers the Wilshire REIT? Where can I find more information about it other than at Wilshire.com? Do you have any thoughts on the Cohen & Steers Realty REIT, their index REIT?
Petey
Alec wrote: Falling REIT correlations:
http://www.efficientfrontier.com/ef/498/reit.htm
In the REIT ETF arena, I'd lean towards the index like ETF's, namely the Wilshire REIT index. While the Vanguard REIT index uses the Morgan Stanley REIT index (which only encompasses 2/3 of the U.S. REIT market), the Wilshire REIT index encompasses the entire U.S. REIT market. Also, the index ETF minimizes manager risk.
Alec
-
- ** Regular
- Posts: 84
- Joined: Tue Nov 26, 2002 3:59 am
- Location: Florida
Petey writes:
I would note that this article was written in 1998. Bernstein's recent quote (from another thread) is:
Of course, the reason for adding real estate IS the low correlation. That's why it behaves well in a portfolio. Even in the 1998 article, Bernstein writes:
Valuations of REITs are currently quite high by historical standards but the sector has become quite popular (some would even say "hot") and new funds are pouring in. Just like anything else, having lots of sectors with low correlation provides plenty of rebalance opportunities (which I recently took advantage of).
My goal is to drop in pieces of everything and rebalance now and then. Right now I don't have precious metals, but will add some once the bloom is off the rose, or international bonds (don't know if I'm ready to go there yet). What I do have has behaved remarkably.
I'm still learning and taking baby steps as I begin to understand something.
Bernstein really sounds quite negative on REITS
I would note that this article was written in 1998. Bernstein's recent quote (from another thread) is:
But if you want a decent-size rebalancing bonus, you will need more than just the three-index-fund portfolio. "The first thing you should add are real-estate investment trusts," advises William Bernstein, an investment adviser in North Bend, Ore. "The big rebalancing opportunities are between stocks and bonds and between real estate and everything else."
Of course, the reason for adding real estate IS the low correlation. That's why it behaves well in a portfolio. Even in the 1998 article, Bernstein writes:
The nature of the REIT industry has changed, and not necessarily for the better. However, this change has at least improved the portfolio characteristics of the asset.
Valuations of REITs are currently quite high by historical standards but the sector has become quite popular (some would even say "hot") and new funds are pouring in. Just like anything else, having lots of sectors with low correlation provides plenty of rebalance opportunities (which I recently took advantage of).
My goal is to drop in pieces of everything and rebalance now and then. Right now I don't have precious metals, but will add some once the bloom is off the rose, or international bonds (don't know if I'm ready to go there yet). What I do have has behaved remarkably.
I'm still learning and taking baby steps as I begin to understand something.
WiseNLucky
I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
REITs
Petey,
Here's a link to the company that manages the Wilshire REIT ETF (RWR):
http://www.streettracks.com/pages/wilshire.shtml
Here are some links to Indexfunds.com, having to do w/ ETF's:
http://www.indexfunds.com/articleSelect ... skwds=ETFs
http://www.indexfunds.com/data/ETFScreener.php
Bernstein says that the change in the REIT industry (from conservative to more aggressive) has lowered the correlations w/ other asset classes. The industry change may result in more severe boom and bust cylces, or more fat tails (as opposed to normal distributions) in returns.
The dividend yield is simply the dividends divided by the NAV of the fund. So, when REITs are doing well (like recently) the NAV (or price) goes up faster than the dividends paid, and the yield drops. And if we remember that when prices go up, expected returns go down, and when prices go down, expected returns go up, the low historical yield indicates a lower future return, and not a good buying opportunity (by historical standards).
· Caveat: One could have looked the same way at the U.S. stock market (or U.S. large cap stocks) in the early to mid 1990's and come to the same conclusion, but then would have missed out on all those irrational gains in the late 1990's. So, you have to be prepared to be wrong for many years if you forgo an asset class for these reasons.
If REITs really will be lowly (or even slightly negatively correlated) to stocks and such, then I'm not sure their "non-attractiveness" right now makes them totally excludable from a portfolio. I don't think I'd jump in with both feet, but rather DCA or value average my way in. If you are building a truly diversified portfolio, you will always be buying into something that has done well for a while and something that has done terrible for a while. The simple fact is you cannot ever know if they will continue to do bad or well in the future. "Cloudy the future is."
The Cohen & Steers ETF only has about 30 REITs in it, although this may be enough diversification in the REIT sector (I'm not a REIT expert at all, btw). But, I'd rather go with the Wilshire ETF for more diversification in the REIT sector, and less chance of management error.
Again, I would not consider myself that knowledgeable about REITs. These are only my musings from what I've read.
- Alec
Here's a link to the company that manages the Wilshire REIT ETF (RWR):
http://www.streettracks.com/pages/wilshire.shtml
Here are some links to Indexfunds.com, having to do w/ ETF's:
http://www.indexfunds.com/articleSelect ... skwds=ETFs
http://www.indexfunds.com/data/ETFScreener.php
Bernstein says that the change in the REIT industry (from conservative to more aggressive) has lowered the correlations w/ other asset classes. The industry change may result in more severe boom and bust cylces, or more fat tails (as opposed to normal distributions) in returns.
The dividend yield is simply the dividends divided by the NAV of the fund. So, when REITs are doing well (like recently) the NAV (or price) goes up faster than the dividends paid, and the yield drops. And if we remember that when prices go up, expected returns go down, and when prices go down, expected returns go up, the low historical yield indicates a lower future return, and not a good buying opportunity (by historical standards).
· Caveat: One could have looked the same way at the U.S. stock market (or U.S. large cap stocks) in the early to mid 1990's and come to the same conclusion, but then would have missed out on all those irrational gains in the late 1990's. So, you have to be prepared to be wrong for many years if you forgo an asset class for these reasons.
If REITs really will be lowly (or even slightly negatively correlated) to stocks and such, then I'm not sure their "non-attractiveness" right now makes them totally excludable from a portfolio. I don't think I'd jump in with both feet, but rather DCA or value average my way in. If you are building a truly diversified portfolio, you will always be buying into something that has done well for a while and something that has done terrible for a while. The simple fact is you cannot ever know if they will continue to do bad or well in the future. "Cloudy the future is."
The Cohen & Steers ETF only has about 30 REITs in it, although this may be enough diversification in the REIT sector (I'm not a REIT expert at all, btw). But, I'd rather go with the Wilshire ETF for more diversification in the REIT sector, and less chance of management error.
Again, I would not consider myself that knowledgeable about REITs. These are only my musings from what I've read.
- Alec
ataloss wrote: if you look at the chart for vgsix, it pretty much went into a free fall around the time of the bernstein article in april 98 (2000 was a better time to buy ) He was right to be cautious at the time
Apparently 1997-98 was quite bubble-icious in the REIT industry. It's not as bad yet, but if it continues on up for another several months, I'll be looking to unload some. At current levels, I think it's prospective long term returns compare favorably to the S&P 500s. I would be cautious about putting a large lump sum in the class right now, but wouldn't hesitate to start DCAing at these levels.
What out there has better prospects? Icelandic TIPS seem to offer a better risk reward, if we can assume Iceland won't default. I'm actually quite bullish on Iceland long term because of their world leading charge into the hydrogen economy fueled by their immense geothermal energy resources.
Anyway, the 1998 Bernstein article correctly noted that REIT management was behaving rather poorly at that time. The crash in 1998-1999 seems to have wrung a lot of that out of them for the time being. They are issuing more shares into this bull market, but not anywhere close to the levels seen in the previous bubble.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus