Mark Snyderman, a portfolio manager with Fidelity Investments, has overseen a broad range of real estate investment portfolios in his career.
In the 1980s, he managed portfolios of commercial mortgage loans and commercial mortgage-backed securities (CMBS). He joined Fidelity in 1994 as a specialist in CMBS. However, after taking over the Fidelity Real Estate Income Fund in 2003, he has focused on a conservatively managed portfolio with a yield orientation.
Snyderman spoke with REIT magazine about how to approach income-centric investing, the heartburn being caused by the Federal Reserve’s monetary policy and key issues for the REIT market in 2016.
REIT: As the manager of an income-oriented fund, how do you think that influences your investing philosophy relative to standard funds?
Mark Snyderman: The Fidelity Real Estate Income Fund is designed to have more yield and less risk than traditional real estate stock funds. We also want to provide a good total return for the risk. We accomplish these goals by investing in a mix of common stocks, preferred stocks, bonds (both investment-grade and high-yield) and CMBS.
Per the rules of the fund, we have to keep the common stock portion of the fund at less than 50 percent of the assets. By mixing in these more senior types of securities, we lower the risk of the fund. Also, since many of these other types of securities have higher yields than common stocks, they help increase the yield of the fund.
REIT: What makes real estate a good fit for income-oriented investors?
Snyderman: Real estate securities are great for income-oriented investors because real estate generally produces steady, dependable cash flows. These property-level cash flows cover the payments on all these types of securities.
Of course, one of the tricks in managing a fund like this is analyzing those property cash flows into the future to see which securities will do well and which not so well.
REIT: When it comes to investing in real estate equities, do you find any common characteristics among the companies that tend to produce the best yields?
Snyderman: In general, there is a tradeoff between common stock yield and a company’s growth prospects. So, more yield equals less growth. But it’s not always linear.
The idea here is to find companies where the sum of the yield and the growth creates a very good total return. In the fund, I tend to own both low dividend, higher growth companies as well as those with less growth and much more yield.
REIT: How has the seemingly endless speculation regarding the Federal Reserve’s interest rate policy affected your investing strategy and execution?
Snyderman: I don’t think I can add any value in predicting interest rates—so I don’t try.
Instead, I try to minimize the fund’s sensitivity to interest rate movements through security selection. For example, I avoid buying long maturity bonds that already trade at narrow credit spreads. They don’t have enough up-side.
Instead, my team and I do deep credit work to find bonds and CMBS that we can buy at wide credit spreads and that have a great deal of upside. If we buy a bond for the fund at a 500 basis point credit spread and it eventually tightens to 200 basis points over three to five years, which is our goal, we can still produce a decent return, even if interest rates rise a few hundred basis points in that interval. Thus, credit spread tightening can make up for interest rate increases.
REIT: Do you find more interest in your product from the retail investment marketplace or institutional investors?
Snyderman: Financial intermediaries—broker/dealers, banks, trust companies, registered investment advisors, et cetera—represent the majority of the fund’s assets and have been the primary source of asset growth in recent years. They have embraced the fund as a conservative alternative to more typical real estate equity funds and also as a bond fund alternative.
The fund’s attractive yield and historically low volatility compared with its total return have been the primary drivers of the high level of interest that we’ve seen from this segment. We consider this to be an institutional segment, despite the fact that the end investors here are in fact individuals. Direct retail investors who hold the fund on the Fidelity brokerage platform represent a smaller portion of the fund’s assets.
REIT: What kinds of assets—bonds, commodities, et cetera—do you view as competing against your fund for space within income-oriented portfolios?
Snyderman: I think income-oriented investors also consider high-yield bonds and income-oriented stocks.
REIT: If you had to single out your biggest concern for the REIT market in 2016, what would it be?
Snyderman: For 2016, I worry about the possibility that property values could go down a little and spook the market. I’m not saying that it’s likely, but it is a worry.
If that happens, I hope to still be able to produce a positive return for the fund’s shareholders due to the fund’s mix of different types of securities, many of which have a much larger “margin of safety” than do most common stocks.
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