Why I Bought RQI This Week

Summary

  • RQI is leading my real estate CEF ranking now.
  • Fast facts on this fund.
  • Past performance.
  • Buy-and-hold vs. rotational strategy.
  • This idea was discussed in more depth with members of my private investing community, Quantitative Risk & Value. Learn More »

Home For Sale Real Estate Sign and House.

Feverpitched

Ranking real estate closed-end funds

Academic research shows that CEFs (closed-end funds) with a positive discount to NAV (net asset value) have historically outperformed their peers, and that this discount has mean reversion characteristics. In 2016, I designed a score formula mixing such specific CEF anomalies with classic stock anomalies related to dividend and momentum. The chart below plots the annualized total return since 2001 of the entire CEF universe partitioned in deciles based on this score. Score values are lower to the left and higher to the right. The ten subsets are reconstituted every four weeks.

Rank simulated past performance

Rank simulated past performance (Portfolio123)

The score formula uses a set of factors in equal weight, without optimized parameters. As shown by this chart, it is statistically related to forward returns on a few weeks to a few months. It doesn't explain how the score is calculated, but it gives some background before exposing numbers in the next table. This table reports current scores for real estate closed-end funds (those holding mostly bonds or with missing data are excluded).

Ticker

Name

Score

NYSE:RQI

Cohen & Steers Quality Income Realty Fund

83.77

RNP

Cohen & Steers REIT & Preferred & Income

74.70

RFI

Cohen & Steers Total Return Realty Fund

56.09

AWP

Aberdeen Global Premier Properties Fund

50.60

JRS

Nuveen Real Estate Income Fund

49.40

NRO

Neuberger Berman Real Estate Securities

32.70

IGR

CBRE Global Real Estate Income Fund

30.07

The best ranked fund is RQI, followed by RNP. The 3 real estate funds of Cohen & Steers are on the podium.

Fast facts on RQI

According to CEFConnect, RQI has a leverage factor of 1.3 and a total expense ratio of 1.91%, of which 0.63% is interest expense. The portfolio is composed of about 78.25% of common stocks, 8.03% of preferred stocks, 8.67% of corporate bonds (about 80% is rated BBB or BB), and the rest is in convertibles and cash equivalents. The next table lists the top 10 holdings, whose aggregate weight is about 48%.

Name

Industry

% of Asset Value

AMT

American Tower Corporation

Infrastructure

9

PLD

Prologis Inc.

Industrial

5.1

PSA

Public Storage

Self Storage

5.1

DRE

Duke Realty Corporation

Industrial

4.9

INVH

Invitation Homes Inc

Single Family Homes

4.6

O

Realty Income Corporation

Free Standing

4.6

WELL

Welltower Inc.

Health Care

4.5

EQIX

Equinix Inc.

Data Centers

3.4

EXR

Extra Space Storage Inc.

Self Storage

3.3

SPG

Simon Property Group Inc.

Regional Mall

3.2

Data: Cohen & Steers

Past performance

The next table shows RQI has beaten the Vanguard Real Estate ETF (VNQ) by about 4 percentage points in annualized return since January 2010 (reinvesting dividends, without tax). Maximum drawdown and volatility point to a higher risk, mostly due to leverage and variable premium/discount. RQI still is ahead of VNQ in risk-adjusted performance (Sharpe ratio). Here, volatility is measured as standard deviation of monthly returns.

since January 2010

Annual.Return

Drawdown

Sharpe ratio

Volatility

RQI

12.69%

-59.17%

0.74

23.18%

VNQ

8.62%

-39.92%

0.66

16.61%

RQI vs. VNQ since 2010

RQI vs. VNQ since 2010 (Portfolio123)

However, VNQ has been more resilient in 2022: it is down -30% year-to-date, whereas RQI is at -37%.

Buy and Hold vs. rotational strategy

RQI is one of the preferred picks of income-oriented investors seeking equity REIT exposure. However, depending on discount and other factors, it is not always a good pick at every point in time. As of writing this, my proprietary score puts it on the top of real estate closed-end funds. It is a relative assessment, not a bullish call on real estate in general. Obviously, RQI performance primarily depends on the sector trend. In my portfolio, this position is rotational and evaluated on a regular basis. The two latest rotations have been closed with losses, but with significant excess returns over buy-and-hold. Even with losses, excess returns compound into the long-term outperformance of the strategy relative to the sector benchmarks. Since 8/2/2021, my real estate fund rotation has beaten the Real Estate Select Sector SPDR Fund (XLRE) by about 14 percentage points. In a bear market, it may help preserve the capital and the income stream. However, past performance is not a guarantee of future return.

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This article was written by

Fred Piard profile picture
14.53K Followers
Data-driven portfolios and risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

Disclosure: I/we have a beneficial long position in the shares of RQI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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