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Serenity Alternative Investments Blog - Serenity Amidst Uncertainty: Risk-Managing The Current REIT Market
March 2020
Serenity Alternative Investments Blog - Serenity Aidst Uncertainty: Risk-Managing The Current REIT Market
- State of the market: REITs have returned -30.4% so far in March, bringing year to date returns to -35.2%. Serenity Alternatives Fund I has returned -8.9% YTD, +26% better than the benchmark.
- Game plan: Risk management remains our top priority, as we work to insulate our portfolio from the upcoming wave of negative economic data and likely surge in corporate bankruptcies.
- The long view: REIT valuations have fallen to 2008-2009 levels, and there are opportunities to buy high quality REITs with fortress balance sheets at very attractive prices. It’s too early to add significant risk, but the fund has opportunistically deployed small amounts of capital.
THE CORONAVIRUS HAMMER: REITS GET HIT WITH THE 2008 PLAYBOOK
What a week. From 3/13/20 – 3/20/20 the MSCI US REIT index returned -25.5%, good for the worst week in the history of the modern REIT era (which began in 1990). No property type was spared, with data centers performing the best at -14.4%, while regional malls dropped -40%. This move came on the heels of the -22% drop which began on Feb. 21st, bringing the total draw-down in REITs to -41% over the course of less than a month.
Going into the week with 25% net exposure, Serenity Alts Fund I was spared from most of the carnage. The warning in our previous newsletter not to buy the dip turned out to me more correct than we hoped. So far this year we have been able to save our clients over 25% relative to the REIT benchmark and 15% relative to the S&P 500, and still have a large cash balance with which to be opportunistic.
REITs are traditionally a defensive investment, as they have highly certain cash flows generated by institutional quality commercial real estate assets. The recent volatility in REIT prices, however, illustrates that they are not immune to the fear and uncertainty that accompany global pandemics. Current performance suggests that investors have dusted off the 2008-2009 playbook, in which any publicly traded company with debt on its balance sheet was viewed as at-risk for bankruptcy.
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