For investors who bought real-estate funds over the last few years, their year-end statement has provided a jolt and created a need for...
For investors who bought real-estate funds over the last few years, their year-end statement has provided a jolt and created a need for self-evaluation.
The problem is that most people react to having their nerves frazzled without the personal exam, which can be a recipe for disaster. In the entire equity universe, real estate had the longest string of positive performance, boasting gains for seven straight years leading up to 2007.
Those profits weren’t wiped out by a year in which the average real-estate fund lost just under 14 percent, according to Morningstar, of which nearly 12 points came in the fourth quarter alone.
By the time year-end statements started hitting mailboxes, however, REIT funds had dropped an additional 9 points during the first two weeks of 2008.
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Studies show that investors head for the door when a drop-off passes the 25 percent mark, and plenty of real-estate funds now are there.
The knee-jerk reaction is why $7.1 billion flowed from real-estate funds in 2007, according to AMG Data Services, marking the first year of net outflows for the category in eight years.
The outflows may have been a mistake, however, not because of any great expectation for a REIT rebound this year, but because they may have damaged the investor’s asset allocation. This is where the self-assessment comes into play.
Many investors in REIT funds bought in well after the winning streak started. In 1999, the market was hot and tech and Internet funds were the rage. Real-estate funds — a good diversifier for a portfolio because they don’t move in lock-step with the traditional markets — were shunned because their returns were ugly compared to the highfliers.
It wasn’t until the bear market was well under way — in 2002 and 2003, after real-estate funds already had gained more than 12 percent annually while the broad stock market was suffering losses of that same size — that a lot of investors took notice and threw their money into real-estate funds.
Frequently, investors justified the decision by saying they wanted REIT funds as a diversifier and not just because they were hot.
The market is now testing that thinking and showing many investors to be liars.
“If you bought real estate for asset-allocation purposes, you might have taken some of your profits off the table during the big years, and you’re wondering if you need to buy more now to stay true to your allocation,” says Tom Roseen, senior research analyst at Lipper. “If you said you wanted this to diversify your portfolio, but now you want to get out of it, then you’re chasing performance, plain and simple.”
Roseen says the ones who are most likely to get hurt “are the ones who say it’s about asset allocation, but who act like performance surfers. … What we’re seeing happen right now creates the kind of conditions where those people suffer a bloodbath, and this could be the latest example.”
Chuck Jaffe is senior columnist at MarketWatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.