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Commercial Real Estate May Help Provide A Smoother Ride On The Road To Your Investment Goals

By Jennifer Perkins, Portfolio Manager, Principal Real Estate Investors Much hasn’t changed since the start of the year! Financial markets have recovered somewhat, but are still volatile due to geopolitical concerns, and declining oil and commodity prices have also impacted stock prices and economic growth. Meanwhile, the chase for yield in a low interest environment still continues in fixed-income markets. With an eye on the road ahead, investors are hoping for a smoother and less stressful ride to meet their investment goals. The vehicle that could get them there is commercial real estate! This is the second in a series of four blog posts highlighting some compelling reasons why we believe many investors should include private – also referred to as direct-owned – commercial real estate in their investment portfolios. While these reasons are not new, market volatility, changing market dynamics, and the potential of lower long-term return expectations raise an opportunity to reiterate the case for considering the asset class for inclusion into your portfolio. Compelling reasons to include private commercial real estate: Adds portfolio diversification. May aid in dampening volatility, potentially increasing portfolio total risk-adjusted return. A source of potential income. A possible defense against unexpected inflation. Just to recap, my last blog post discussed why private commercial real estate hasn’t historically conformed to similar whipsaw behavior the equity market was experiencing at the start of 2016, potentially allowing for private commercial real estate to add true diversification to an investment portfolio. This blog post expands upon Reason 2: Private commercial real estate may aid in dampening volatility and increases the potential for improving total portfolio returns adjusted for risk. As an investor in private commercial real estate, you are buying units of ownership of office buildings, industrial buildings, apartment buildings, retail centers, and even hotels. The buildings comprising a larger portfolio are acquired through private transactions between a willing buyer and seller, specific to individual properties. Investing in tangible properties influenced by space market fundamentals (meaning tenant demand and available supply) versus investor sentiment likely helps to dampen volatility. Unlike Real Estate Investment Trusts (REITs), private commercial real estate is not influenced by fractional ownership trading, which occurs in public markets on a public exchange. Values of private commercial real estate are also supported by in-place contractual leases, typically having meaningful duration, that help drive a steady and fairly predictable stream of income for investors of core, occupied commercial real estate. Investor return requirements on this current income, as well as total holding period returns, are driven by spreads over risk-free rates (Treasurys). Such tenant demand, available supply, contractual lease terms, and investor return requirements don’t dramatically change each and every day, thereby helping to create the potential for a return pattern with lower volatility or variability over an investment period. Over the past 10 years, the ride or return pattern experienced when investing in stocks, bonds, and private commercial real estate has been notably different (see Exhibit A). The return pattern for commercial real estate has been far smoother compared to stocks and bonds. By including an allocation to commercial real estate in an investment portfolio, the ride over the investment period could be smoother, with less turbulence. Click to enlarge Indexed to 100 as of 31st March, 2016; Source: 500 Data (Bloomberg), Investment Grade Corps (Barclays), CRE Private Equity (NFI-ODCE EW); It is not possible to invest directly in an index. Past performance does not guarantee future results. A smoother expected ride also creates the potential for increased total portfolio returns when adjusted for risk. Private commercial real estate could offer a strong income (current) return (historically 70-80% of total return) as well as the potential for appreciation (or depreciation). Exhibit B shows the effects of increased exposure to private commercial real estate has produced a slight increase to total portfolio returns, but most notably, lowered the risk, or volatility, of those returns over the 10-year time period. Therefore, the inclusion of private commercial real estate within an investment portfolio has the potential to increase total portfolio return per unit of risk. Click to enlarge Click to enlarge Click to enlarge Source: S&P 500 Data (Bloomberg), Investment Grade Corps (Barclays), CRE Private Equity (NFI-ODCE EW) In my next blog post, I will discuss Reason 3: Private Commercial Real Estate is a potential source of durable income ; another compelling reason to consider including commercial real estate as part of an investment portfolio. Stay tuned and enjoy the ride! — 1 Percentage of risk shown is the annualized standard deviation of index returns and is a measure of return volatility. 2 Annualized holding period total returns divided by standard deviation of returns over equivalent period. It is not possible to invest directly in an index. Past index performance is not indicative of future return.

Q2 2016 Style Ratings For ETFs And Mutual Funds

At the beginning of the second quarter of 2016, only the Large Cap Value and Large Cap Blend styles earn an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. Investors looking for style funds that hold quality stocks should look no further than the Large Cap Value and Large Cap Blend styles. These styles house the most Attractive-or-better rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management , or good stock picking, with low total annual costs . Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees. See Figures 4 through 13 for a detailed breakdown of ratings distributions by style. Figure 1: Ratings For All Investment Styles Click to enlarge Source: New Constructs, LLC and company filings To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating. Absolute Shares WBI Tactical LCV Shares (NYSEARCA: WBIF ) is the top rated Large Cap Value fund. It gets our Very Attractive rating by allocating over 34% of its value to Attractive-or-better-rated stocks. Ameriprise Financial (NYSE: AMP ) is one of our favorite stocks held by WBIF and earns a Very Attractive rating. Over the past decade, Ameriprise has grown after-tax profit ( NOPAT ) by 8% compounded annually. The company has improved its return on invested capital ( ROIC ) from -2% in 2008 to 11% in 2015. Similarly, the company has increased its NOPAT margin from 11% in 2005 to 14% in 2015. Across all facets, Ameriprise is improving business fundamentals, yet the stock remains undervalued. At its current price of $99/share, AMP has a price-to-economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects Ameriprise to grow NOPAT by only 10% over its remaining corporate life. If AMP can grow NOPAT by just 6% compounded annually for the next decade , the stock is worth $132/share today – a 33% upside. ProFunds Mid-Cap Value ProFund (MUTF: MLPSX ) is the worst rated Small Cap Value fund. It gets our Very Dangerous rating by allocating over 37% of its value to Dangerous-or-worse-rated stocks. Making matters worse, total annual costs are a whopping 6.72%. New York Community Bancorp (NYSE: NYCB ) is one of our least favorite stocks held by MLPSX and earns a Dangerous rating. Over the past decade, New York Community Bancorp’s NOPAT has declined from -$294 million to -$80 million. Over the same time period, the company’s ROIC declined from 8% to a bottom-quintile -1%, while its NOPAT margins fell from 43% in 2005 to -13% in 2015. Worst of all, the stock has not followed this decline in operating performance and is significantly overvalued. In order to justify its current price of $15/share, NYCB must immediately achieve positive pre-tax margins of 18% (from -21% in 2015) and grow revenue by 31% compounded annually for the next 13 years . In this scenario, NYCB would be generating over $20 billion in revenue 13 years from now, which is equal to Aflac’s (NYSE: AFL ) revenue in the last fiscal year. It’s clear the expectations baked into NYCB are overly optimistic. Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds. Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating Click to enlarge Source: New Constructs, LLC and company filings Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost four times that of Very Attractive funds. Figure 3: Predictive Rating Distribution Stats Click to enlarge * Avg TAC = Weighted Average Total Annual Costs Source: New Constructs, LLC and company filings This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them. Ratings by Investment Style Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive. Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 5 presents the data charted in Figure 4 Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style. Figure 6: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 7 presents the data charted in Figure 6. Figure 7: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style. Figure 8: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 9 presents the data charted in Figure 8. Figure 9: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style. The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Value funds have put over 34% of their assets in Dangerous-rated funds. Figure 10: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 11 presents the data charted in Figure 10. Figure 11: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous. Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 13 presents the data charted in Figure 12. Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Hot Launches

By Jeff Tjornehoj Click to enlarge With just $23.9 billion in net inflows this year, exchange-traded products (ETPs) are having their slowest start since the first five months of 2010 when only $18.7 billion in net inflows were made. But the industry continues to launch new products anyway and through this week (May 18) another 88 products have been unveiled. We took a look to see which ones have had the best luck attracting cash. Through May 18 the fastest-growing ETP is the SPDR SSGA Gender Diversity Index ETF (NYSEARCA: SHE ) , which tracks a market-cap weighted index of large U.S. companies that that exhibit gender diversity in their senior leadership positions; it’s attracted $264 million this year. Not too far behind in the asset race, the WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ) has brought in $238 million. This fund holds a basket of dividend-weighted stocks headquartered outside of the U.S. and Canada and dynamically hedges foreign currency exposure for U.S. dollar investors. While three others have managed to accumulate $50 million in assets so far, the rest of this year’s launches are still waiting for investors to find them: the remaining 81 launches this year collectively hold $700 million or just as much as these five.