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While the phrase “this time is different” has been costly for many investors, there is a class of investors that believe we are entering into a "new normal." PIMCO’s Bill Gross and Mohamed El-Erian have been vocal proponents of the new normal doctrine. The PIMCO brain trust believes that we are in a period characterized by subpar, uneven growth with structurally high unemployment. The new normal view is that the debt binge that has taken place over the last few decades will take years to work off. This debt overhang will lead to a drag on the economy. Austerity measures throughout the developed world will lead to lower benefits, reduced social safety net and lower overall spend.
Where are investors to hide in a low growth world?
Mortgage REITs (mREITs), which benefit from a steep yield curve with low short-term funding costs, provide investors a yield haven in a slow growth world. mREITs deploy leverage to bolster net interest income to provide investors with hefty dividends.
We believe mortgage REITs should be used as a “hedge” against a slow growth economy and should make up less than 15% of your portfolio.
The table below highlights many of the largest mortgage REITs. Bill Gross has specifically advocated Annaly Capital Management (NYSE:NLY).
(Click chart to enlarge)
Disclosure: I am long AGNC, NLY, MFA.
Source: REITs: Ideal Investments for the 'New Normal'