Differences between property types also produce varying results. The fund’s fixed allocations seek to ensure diversification and balance.
Responsible use of leverage can also enhance returns, but excessive debt often creates unnecessary risk for investors, especially during economic downturns. PPTY’s portfolio seeks to reduce allocations to companies with high debt in favor of firms with strong balance sheets for a more quality tilt.
Lastly, companies with significant governance risks are excluded from the portfolio to diminish unforeseen risks. The underlying index utilizes two criteria to mitigate governance risk, including external management and low free float percentage.
Due to its indexing methodology, PPTY has a greater tilt toward potential growth segments like residential and industrial real estate, whereas traditional market-cap indices favors the retail segment, which has come under greater stress due to changing consumer habits.
For example, Jerry Bowyer, Chief Economist for Vident Financial, pointed to the shift toward e-commerce and away from traditional brick-and-mortar stores. E-commerce represents 9% of retail sales in the US, 14% in the UK, and 23% in China. Looking ahead, the e-commerce market is projected to expand at a 12% annual rate through 2025.
Consequently, PPTY’s underlying index incorporates specific considerations in real estate location exposure to maximize potential growth opportunities. For instance, PPTYX’s geographic targets increase exposure to relatively attractive retail locations such as New York City, Washington, D.C., and Los Angeles. Moreover, the portfolio is significantly more diversified than market-cap weighted indices by reducing concentration risk among high-density urban areas like New York City and Boston.
Andrew Alden, Head of Quantitative Research for WeatherStorm Capital, broke down PPTY’s holdings to data centers 7.5%, diversified 7.5%, health care 7.5%, hotel 7.5%, industrials 14.%, manufactured home 2.0%, office 17.5%, residential 19.0%, retail 14.5%, self-storage 2.0% and student housing 0.5%. Additionally, he revealed the top geographic target allocations, including New York-Newark-Jersey City, NY-NJ-PA Metro Area 14.7%; Los Angeles-Long Beach-Anaheim, CA Metro Area 7.2%; and Washington-Arlington-Alexandria, DC-VA-MD-WV Metro Area 6.3%.
Financial advisors who are interested in learning more about the real estate sector can register for the Thursday, May 31 webcast here.