A written weighting rule is what saved my 14-month REIT sleeve

Closed out the first full cycle of something I set up deliberately, so here's what actually happened.

Setup: 140k allocated to a public REIT sleeve, deployed in four tranches over about five months rather than all at once. Target weights written down before I bought anything. 30 industrial, 22 data centers, 15 senior housing / healthcare, 13 residential, 10 net lease retail, 10 cash held for rebalancing. Zero office by decision, which I'll come back to.

What worked: the tranche schedule. I wrote the dates in advance and bought on them regardless of what the price did that week. Two of the four tranches went in during weeks I would absolutely have skipped if it had been discretionary, and those two are carrying most of the return. Total return across the sleeve came in at roughly 19 percent over the 14 months, of which a bit over 4 points was dividends. Data centers and industrial did almost all of the work. Senior housing was flat for nine months then moved sharply.

What nearly broke it: month six. Rates repriced, the whole sleeve went down about 11 percent inside three weeks, and my industrial and data center names fell hardest because they'd run up most. I had drafted an email to my wife about pulling out. What stopped me was that the rebalancing rule said to buy, not sell, when a target weight fell more than 5 points below target. So I put half the cash reserve in. That purchase is up more than anything else I own.

The zero-office decision I'm less sure about in hindsight. It was the right call on most of what I looked at, and it also meant I owned none of the well-located buildings that came back. I traded a chunk of upside for not having to make a hard call on each building. I'd probably do it again but I want to say out loud that it cost something.

What I'd keep: written target weights, written tranche dates, a rebalancing trigger with a number in it. What I'd change: my cash reserve at 10 percent was too small for a drawdown that size. 15 would have let me buy twice.

5 replies

2megan_doyle15 Get yours

What does "tranche" mean here, just buying in four chunks on set dates? Sorry, everything is new.

2raj_mehta14CapitalPRO6

@rigging yes, that's all it is. Four buys spread out instead of one, with the dates decided ahead of time so you're not guessing.

@quill the part I want to push on is the 5 point rebalancing trigger. Was that 5 percentage points of portfolio weight, or 5 percent of the position value? Those are very different triggers on a 22 percent target. Five points means data centers has to fall to 17 percent of the sleeve, which is a big move. Five percent of value fires almost constantly.

1sonia_alvarez Get yoursPRO6

Percentage points, I'd assume, otherwise he'd have been trading every week.

The thing I'd have wanted to know before month six is what the debt looked like on the industrial and data center names. Those two sectors have been buying and building a lot, and building means borrowing. When you say they fell hardest because they'd run up most, that's one explanation. The other is that the market was repricing their funding cost. Do you know which it was for your specific names? If it was funding cost, the same drawdown will come back the next time rates move, and your 15 percent cash reserve gets tested again.

1carlos_nunezActive

19 percent over 14 months with 4 points of that from dividends means about 15 points of price appreciation. Fine result. My question is what the number looks like if senior housing hadn't moved sharply at the end. You said it was flat for nine months. If that 15 percent weight had stayed flat the whole way, are you at 16, 17? Still fine, just want to know how much of this is the rule and how much is one sector cooperating late.

Also, drafting the email and not sending it is the actual skill. Everyone thinks the skill is picking.

2gregpowell66AG4BPRO8

The supply side is the part I find most convincing about the industrial and data center weighting, and it's the part you didn't mention. Starts have dropped hard in a few of these sectors, and I've watched projects around me stall out at the financing stage. Less new product delivering in two years means the existing owners get to push rents. That's a real mechanism, not a story.

Where I'd disagree with your hindsight on office: you didn't trade upside for simplicity, you avoided a job you weren't set up to do. Judging which specific building comes back requires knowing the submarket, the floor plates, and who the tenants are. From a brokerage account you can't know that. Skipping it was consistent with what you could actually verify.

A written weighting rule is what saved my 14-month REIT sleeve

5 replies