First REIT sleeve: even across the sectors, or lean into the ones with tightening supply?

Question

I have a list of nine names and a broad index fund written on the same page and I keep switching which one is underlined. Not buying yet.

The tilt argument is straightforward. Supply forecasts for some property types are falling sharply over the next couple of years, which hands existing owners pricing power, and sectors like industrial and senior housing look different from office in ways that seem structural rather than cyclical. If sector dispersion is that wide, buying the average means deliberately owning the weak half.

The even-weight argument is that I would be making a sector call as a person who has never owned a building of any kind. The tailwind narratives are widely known, which presumably means some of them are already in the price. And a hand-picked tilt is something I have to maintain, rebalance, and hold through the stretch where it looks wrong, which is exactly the behavior I have no track record on.

There's a middle option where I hold the broad fund as the base and put maybe 20 percent of the sleeve into one or two sector positions, which limits the damage if I've called it wrong but also limits the point of calling it at all.

Curious where people who've actually run one of these landed.

karen_whitfield · Answer

A tilt is a promise to hold something through the period when it embarrasses you. I've held land through stretches where the only thing happening was the tax bill, and the reason I could do it was that I'd written down why I bought it. If you can't write two sentences about your industrial overweight that would still convince you after it's down 20 percent, buy the index and get on with your life.

renee_dubois · Answer

@bramble the thing my units taught me that transfers here is that the property type determines what breaks and how often, and those are wildly different businesses. A warehouse with one tenant on a long lease and a senior housing building with staffing and turnover every year are not the same risk with a different label on it. Whether you should bet on which one wins is another question, but even weighting them as if they were interchangeable never sat right with me.

brandonlee36 · Answer

I ran a base plus tilt for about two years and the honest lesson was about maintenance, not selection. My tilt started at 20 percent of the sleeve, the tilted sector ran up, and eight months later it was 31 percent of the sleeve without me deciding anything. Then I had to choose between trimming a winner and living with a concentration I'd never have chosen deliberately. I trimmed, twice, and both times it kept going up afterward.

So the middle option costs you two decisions a year and some regret. Whether that's better than the index depends entirely on whether your sector read was right, and mine has been about half right.

omar_haddad · Answer

@thicket that's tilt creep and it's the same shape as scope creep on a renovation. Nobody ever decides to double the budget, it just arrives one reasonable change at a time. The fix on my jobs is a written limit and a date I check it against, and it sounds like the same fix applies here. @bramble if you go base plus tilt, write the ceiling percentage down before you buy anything, because you will not invent a fair one while you're looking at a green number.

First REIT sleeve: even across the sectors, or lean into the ones with tightening supply?

4 replies