RFI - RFI: A Potential Winner Coming Out Of A Credit Event

2023-08-07 08:04:07 ET

Summary

• Cohen & Steers Total Return Realty Fund aims for high total return through investment in real estate securities.
• RFI's unique strategy includes a managed distribution policy, providing flexibility for regular monthly distributions.
• RFI has demonstrated commendable performance, beating its benchmark and showing resilience to market downturns.

Buy land, they're not making it anymore. - Mark Twain

The Cohen & Steers Total Return Realty Fund ( RFI ) is a prominent player in the REITs sector. RFI's primary objective is to achieve a high total return through investment in real estate securities. These securities encompass common and preferred stocks, as well as other equity securities issued by real estate companies, real estate investment trusts (REITs), and similar REIT-like entities.

A unique aspect of RFI's strategy is its managed distribution policy. This policy enables the fund to realize long-term capital gains and distribute them on a regular monthly basis. This approach provides the fund with the flexibility to deliver the fund's long-term total return potential through regular monthly distributions.

Composition of RFI's Portfolio

RFI's portfolio is primarily concentrated in the US, providing it with some advantages over other global funds.

RFI's blended index for its benchmark consists of 80% FTSE Nareit Equity REITs Index and 20% ICE BofA REIT Preferred Index. The fund's largest deviations come from having corporate bonds versus preferred shares, a move aimed at neutralizing duration risk as preferreds tend to get more damaged in rate hikes than limited duration bonds.

RFI's Performance Over the Years

RFI has demonstrated commendable performance over multiple timeframes. It has consistently beaten its benchmark, a rare feat that attests to the fund's robust investment strategy and management. The fund's performance also stands out relative to other REIT funds, mainly due to its blend of REIT/Preferred mix and its lack of leverage, contributing to lower volatility compared to most closed-ended REIT funds.

RFI's Response to Market Conditions

As the real estate sector is sensitive to changes in interest rates, RFI's performance has been affected by the Federal Reserve's interest rate hikes. Despite this, the fund has managed to mitigate the impact through its investment strategy and portfolio composition.

RFI has also demonstrated resilience to market downturns, thanks to its unleveraged structure. During periods of market downturns, funds with no leverage are generally seen as less risky and volatile, making RFI a relatively safer choice.

The Impact of a Market Correction on RFI

While REITs, including RFI, broadly look interesting as investment options, it's worth considering the impact of a market correction on their attractiveness. A market correction, characterized by a temporary decline in stock prices after a period of market upswing, can offer an opportune moment to invest in REITs like RFI, potentially providing lucrative returns once the market rebounds.

I've been hammering risks lately on this. If I'm right that we are on the verge of a credit event, REITs likely look very attractive coming out of it.

The Verdict

In conclusion, the Cohen & Steers Total Return Realty Fund stands out as a notable player in the REITs sector, offering a high yield, robust performance, and a well-diversified portfolio. While the fund's performance is subject to market dynamics, notably interest rate changes, RFI's investment strategy and portfolio composition have proven effective in mitigating these impacts. With the prospect of a market correction in the broader markets, RFI could potentially emerge as an even more attractive investment option.

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