You Can’t “Peanut Butter” REIT Diversification

Active portfolio management for REIT investment strategy at Sheaff Brock Investment Advisors

You Can’t “Peanut Butter” REIT Diversification

Sure, diversification is key when selecting holdings for a Real Estate Investment Trust portfolio, Sheaff Brock Director Jim Murphy acknowledges. But you can’t just take a “peanut butter” approach to the real estate market, he cautions, spreading resources evenly among different sectors and assuming investment magic will ensue. After all, he reminded our SheaffBriefs editor, different sectors perform differently in different economic times.

In times of high population growth and high job creation, for example, it may make sense to overweight the REIT portfolio with:

  • storage facilities— (people are changing locations for their new jobs, with little time to deal with their “stuff”—storage provides a quick solution that often turns into a long-term arrangement)
  • office buildings— (companies are expanding their operations and hiring new employees)
  • multi-unit residential properties—(busy, unmarried professionals, particularly Millennials, often prefer apartment living near their places of employment to single home ownership).

During times when there is strong retail sales growth, it may make sense to overweight holdings in:

  • shopping malls
  • industrial buildings

Point is, Murphy stresses, active portfolio management can be key to success in real estate investing. Yes, the process of designing the Sheaff Brock Real Estate Income and Growth portfolio was done with great care, focusing on two related factors:

  • avoidance of downside risk
  • high diversification

But that portfolio design is just the beginning. “Spreading the bread with peanut butter and thinking you’re done preparing the sandwich” is not at all the Sheaff Brock plan, which is designed for active, professional management every step of the way. Since REITs trade on major exchanges like stocks, one of the big advantages of this form of investment is liquidity. This enables managers to make appropriate ongoing reallocations in the portfolio. Still, when REITs first came on the marketplace sixty years ago, they consisted almost entirely of office buildings, so that most lacked sufficient diversification to weather subsequent economic upheavals.

While the Sheaff Brock Real Estate Income and Growth portfolio’s goal is to take diversification to a whole new level with its mix of medical properties, apartments, storage facilities, hotels, timberland, utilities, and even billboards, that’s just the opening gambit. As time passes and economic conditions change, more emphasis will be put on certain sectors, less on others.

At Sheaff Brock, we have a healthy respect for the power of active, ongoing, portfolio management. As Jim Murphy so aptly puts it: You just can’t “peanut butter” REIT diversification!

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