After the sharp sell-off in global stock markets across the board in May, 2012 is once again proving itself to be a tough year to make money.
A casual glance at the back page of last week’s Economist magazine reveals that unless you put your money to work in Egypt, Colombia, Turkey, Thailand or Pakistan — hardly the “Big Five” of global stock markets — you probably haven’t made much money in the financial markets this year.
But there is one asset class that has both made solid gains and held up extremely well — even in the face of recent market turmoil.
Ironically, it’s the asset class that played the biggest part of getting us into the global financial crisis in the first place. And that asset class is “real estate.”
Hardly a day passes without pundits debating the niceties of whether or not the real estate market has bottomed.
Yet, it seems that some big-name investors have already made up their minds.
Just yesterday, Warren Buffett revealed that he is raising his bet on a rebound in U.S. real estate, with a $3.85 billion bid for the mortgage business and loan portfolio of bankrupt Residential Capital LLC. Not so long ago, the “Oracle of Omaha” declared that he’d buy up “a couple hundred thousand” single-family homes in the United States if it were practical to do so.
Sadly, he can’t, as Berkshire Hathaway (BRK-B) is just too darn big. So I think his bid for Residential Capital’s assets is clearly another way of playing this same investment theme.
I think Buffett has it right for a couple of reasons.
Look beyond the doom-and-gloom headlines that are carefully crafted to ensure you start your financial day on a depressing note, and you’ll catch a glimpse of more and more good news coming from the U.S. real estate market.
Here’s a short list.
According to RealtyTrac Inc., foreclosure filings in the United States have fallen on an annual basis for 20 straight months. Average home prices jumped 1.8% in March, the biggest monthly increase in at least two decades. Sales growth in major U.S. markets in May was well above 20%, compared to the same month last year.
Personally, I recently was both chastened and pleased to learn that the asking price for an income property identical and next door to one I bought in Florida two years ago is now 25% higher than what I paid. I suddenly felt that visceral twinge of my own “fear” turning into “greed.”
Maybe I should have bought another one cheaply when I had the chance.
There’s even more evidence of a turnaround in real estate.
First, both U.S. and foreign real estate are asset classes in my “Ivy Plus” investment Program — an investment strategy at my firm Global Guru Capital that mimics the asset allocation of the Harvard Endowment.
Here’s how the allocation to the U.S. real estate market — through the Vanguard REIT Index ETF (VNQ) — has fared in the past three months versus the S&P 500.
Not much to write home about. But it’s still a lot stronger that the S&P 500 has been in the past three months. With a gain of 10.86%, VNQ is also the top-performing asset class in the “Ivy Plus” Investment Program in 2012.
The story is much the same with SPDR Dow Jones Intl Real Estate (RWX) — the program’s allocation to foreign real estate.
As you can see, RWX also has strongly outperformed its own, more relevant benchmark of the MSCI EAFE index of global developed market stocks over the past six months. And even fighting the headwind of an appreciating U.S. dollar, it’s up 10.26% so far this year.
As compelling as these returns are, the most intriguing (and impressive) is the performance of a portfolio of U.S. Mortgage REITS through the iShares FTSE NAREIT Mort Plus Cp Idx (REM).
Not only has this portfolio of U.S. Mortgage REITs outperformed the S&P 500 by close to an impressive 8% over the past three (very tough) months, but REM also yields an eye-popping 11.49%. That’s close to 50x of what you’re getting on your cash in your bank account.
REM is also a current recommendation in my new income-focused trading service, Dividend Pro, and a position I hold on behalf of some of my clients at Global Guru Capital. Ironically, in terms of yield, REM is the least attractive of my current U.S. Mortgage REIT recommendations.
And here’s what also surprising…
Some of the smartest investors in the world can’t touch these investments.
Last night, I was out with a new friend who runs a global hedge fund in London. And I ran the idea of investing in U.S Mortgage REITs by him.
His reaction? “Very interesting. But we can’t invest in these because they’re not part of our investment mandate.”
But I strongly recommend that you join Warren Buffett and bet on a turnaround of the U.S. real estate market, and make it part your own personal “investment mandate.”
It just may turn out to be your best investment of the year.
Nicholas A. Vardy
Editor, The Global Guru