Chart of the Week - Hating REITs
Investors hate REITs (judging by the shift in market share of REIT funds).
I call this week’s indicator (i.e. total assets under management in REIT ETFs as a percentage of all ETF assets) “implied allocations“ because we can think of it as a rough proxy for how investors in ETFs are positioned in the aggregate.
This indicator has reached an all-time low as investors have steadily drifted out of REITs and into other hotter and growthier parts of the market.
There’s to two key factors driving this.
1. Market Movements: if investors make no changes to their portfolios, market movements will shift allocations for them as some assets do better than others. For example over the past 5 years US REITs are up about 5% while the $NASDAQ(.IXIC)$ is up about 120% — that by itself will drive a big shift in allocations if investors just do nothing.
2. Flows and Rebalancing: but as you might guess, investors rarely do nothing — there are a further 3 forces at play; rebalancing, flows, and active decisions.
Rebalancing involves investors who started with an ideal allocation in mind bringing the portfolio back to those weights basically by selling a portion the winners and buying the losers within their portfolio.
Flows is 2-fold.
One aspect is the point that for many investors they’ll be injecting more funds into their portfolio over time, and either investing according to some ideal allocation mix or making decisions on the fly.
The other aspect is performance chasing flows; as a group investors tend to chase yesterday’s winners and shun yesterday’s losers. This behavioral dynamic is well documented, easily observable, and reinforces momentum effects. And in some respects this is a combination of flows AND market movements (as price drives sentiment and future decision making).
The final part is active decisions, which are interlaced throughout all this — rebalancing might be fully discretionary, new investors might decide to go all-in on the top performing sectors, and new money in the portfolio has to go somewhere.
But also, from time to time you change your ideal allocations and get new ideas; make active decisions in portfolio strategy and allocations.
All of this is a long way of saying that the line in the chart below moves partly due to price movements but also is heavily influenced by investor behavior and decision making. And after-all, even if you argue that it’s all just a result of market movements, the thing is investors could still decide to not go with the flow…
As for the implications, simply put: if you like REITs you’re in the minority — it’s a contrarian position to be bullish REITs, and if the sector started doing better it would leave many people surprised and underexposed.
Key point: Investor allocations to REITs are at record lows.
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