EQIX - 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.

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.

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).

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%.

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.

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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