Specialty REITs and Other High Yield Vehicles

by: Roger Nusbaum

One thing that we saw during the worst of the financial crisis is that many high yielding vehicles blew up badly. Here the list can include specialty REITs, leasing companies, infrastructure trusts, royalty trusts and a few things I'm probably forgetting.

A big part of the story was fundamental. Some of these things rely on the capital markets to function in order to do transactions relevant to their businesses like buying planes or ships or whatever.

The chart at right (click to enlarge) captures several of these types of holdings from before the crisis; the names don't matter. The idea here, for you to agree or disagree with, is that while the market functions normally these things do ok. To be clear the context is the market functioning not going up or going down. There was a stretch there between the failures and short sale bans where the markets weren't functioning properly.

The markets may or may not go down a lot from here, and if it doesn't go down soon then it will go down a lot in a few years (not a prediction, just stating the obvious cyclical nature of markets) but the odds of the market not functioning anytime soon are quite low.

If this turns out to be true then these sorts of income vehicles will go back to being of interest again. Many of them went down a lot and have come back to some degree as the panic subsided so any exposure for a trade becomes unlikely, but back to the original purpose of these as I used to write about them (and used to use them for clients) which is to own one or two of them in moderate weightings to add some yield and often dampen volatility.

Hopefully it is understood that these things need to be properly researched and understood (whatever that means to you) but as was important four and five years ago (so before the crisis) moderation is key. I used to talk about the potential for these having unforeseen problems but that this would not be a deathblow for anyone who owned one or two of these in moderate proportions. They did blow up, we did own a couple but the impact was small for their proportion in the portfolio.

I had not thought about owning these in a serious manner for a long time. It is kind of funny to circle back to thinking about them and the same warnings of moderation reinforce the idea of the cyclicality of markets which, despite the depth of the decline, could be reassuring.

Disclosure: None