As of the close of business today, S&P Dow Jones Indices and MSCI will reclassify stock-exchange listed real estate companies and give them a separate sector. Real Estate is being removed from the Financials Sector and promoted to its own sector, making it the 11th GICS (Global Industry Classification Standard) headline sector. The move eliminates 28 real estate investment trusts (REITS) and real estate management and development companies, thereby reducing the Financial Sector’s weight. Mortgage REITS will remain in the Financial Sector with banks, brokers, and insurance companies, under a new sub-industry banner called Mortgage REITS. The Real Estate Sector is the first new headline sector since GICS was created in 1999.
David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said that over the years, investors had suggested that REITS were lost amid the banks and brokers. The change distinguishes real estate stocks from other financial stocks and recognizes the growing position of real estate in today’s economy. Over the past 25 years, the total market cap of REITS listed in the US has grown from $9 billion to almost $900 billion.
The new classification should increase the visibility of real estate, with the goal of encouraging investors to more actively consider real estate when developing portfolios. To note, the change will actually be implemented in MSCI and S&P Dow Jones indices on September 16, 2016 as part of their annual index rebalancing.
At Washington Trust Bank, we already recognize the benefits of real estate investing and have included real estate in our portfolios as a distinct asset class, categorized as one of our real return strategies. The goal of these strategies is to preserve and enhance purchasing power. Inflation is a key factor in asset returns and real estate provides an important inflation hedge. Additionally, real estate delivers another source of returns and broadens diversification.
Since our large cap domestic equity portfolio mirrors the Sector exposure of the S&P 500, our investment in domestic stocks will now include a distinct real estate allocation as well.
Consequently, we reviewed our real estate exposure to ensure that the changes do not give us an undesired bias to real estate. Looking at the numbers, the Real Estate Sector will be approximately 3% of the S&P 500 Index. For our balanced growth investors, that equates to an increased allocation to real estate of a little over .6%. This additional exposure should not have a material effect on portfolio risk or return. As a result, beyond adding the Sector to our large cap domestic equity holdings, we will not make any other changes to our real estate allocation.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.