Getting Real with Your Portfolio

Tab 1

October 28, 2016

For years, U.S. Bank Wealth Management has viewed real estate as one of the four pillars of a well-diversified portfolio, along with equities, fixed income and commodities. On Sept. 1 of this year, the world’s major stock index curators validated this philosophy and established real estate as one of the core 11 sectors that comprise their indexes. Previously, real estate was included in an industry group within the financial sector.


“As one of the cornerstone asset classes, we believe that real estate can play a role in just about everyone’s portfolio, of course depending on their investment objectives, life needs and life goals,” says Eric Lee, Vice President of the Traditional Investments Group for U.S. Bank Wealth Management. “The decision to designate real estate as a sector is a recognition that these investments are unique and different from other financial service companies such as banks, insurers and brokerages."

Diversification by Design


Real Estate Investment Trusts (REITs) account for much of the new real estate sector, which also includes real estate development and management companies. Mortgage-related companies will remain in the financial sector.

Tab 2

October 28, 2016

Real estate is the first new economic sector established for the financial markets by the Global Industry Classification Standard (GICS), a collaborative effort between leading index firms Standard & Poor’s and the MSCI World (maintained by MSCI Inc., formerly Morgan Stanley Capital International), since it rolled out its original group of 10 sectors in 1999.


According to Lee, REITs are generally a unique hybrid between stocks and bonds in that most pay a dividend yield that’s generally higher than most stocks. But unlike bonds, there’s an opportunity for share appreciation and growth.


“While past returns are not a guarantee of future performance, this move helps spotlight a type of investment that has historically generated solid risk-adjusted returns and may not be closely correlated with other financial assets,” says Edgar W. Cowling, Senior Vice President and Director of Specialty Assets for U.S. Bank Wealth Management.

However, investments in real estate securities can be subject to fluctuations in the value of the underlying properties, economic conditions, changes in interest rates and the risk of rental defaults.


Those digging into the REIT space will find a broad spectrum of offerings, including investments focused on niches such as apartment complexes and other multifamily housing developments, shopping centers, health care facilities and the self-storage industry. Some are national in scope while others target a metropolitan area or region of the country.


As part of a standalone sector, Lee believes, REITs are now positioned to attract deeper analysis from money managers who may have previously glossed over the investments when they were nestled within the financial sector.


In turn, he anticipates that the heightened attention on REITs may lead to rising investment levels.

Tab 3

October 28, 2016

Cowling adds that REITs traded in public markets can provide an investor with access to both impressive commercial properties and highly regarded management teams without the hassle of direct real estate ownership.


“Direct ownership of real estate offers many potential benefits, such as control and tax advantages, but may also have higher entry points, limited liquidity and management requirements,” he says.“REITs, on the other hand, are designed to provide diversified exposure with liquidity and may fit well into many of our clients’ portfolios.”


Home Should Be Where the Heart Is


Still, Lee and Cowling stress that their insights around real estate are rooted in the investment side of a client’s estate — separate from personal property such as a primary residence and vacation

home, as well as any property tied to the family business.


“Adding a REIT to your portfolio is an investment decision — one that we believe will behave differently than stocks, bonds and commodities,” Lee says.


“Alternatively, everybody needs a place to live, there are direct expenses related to living somewhere, and there’s much more of an emotional connection. Objectively, we think those are not characteristics of a sound investment.”


However, now identified as their own sector in the world’s major indexes, REITs and other commercial real estate interests may soon be an appropriate consideration for your well-constructed investment portfolio.


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