In light of the Fed's mid-summer suggestion that its bond-buying program could start to wind down in September, a certain amount of volatility was removed from the portfolio by selling all holdings of mortgage real estate investment trusts (mREITs). The mREIT allocation had been particularly damaged by the rise in rates and the Fed's indication that tapering of its bond buying would soon occur.Goldman Sachs recently issued a sell rating on two big agency mortgage REITs, Annaly Capital Management ( NLY) and American Capital Agency Corp. ( AGNC). "While agency mortgage REITs have already significantly underperformed the market this year… we think investors and sell-side analysts have been slow to realize the downside potential," according to the Goldman report which was excerpted by Michael Aneiro at Barron's. (SPX), Dow Jones Industrials (DJIA) and NASDAQ Composite (NDX), according to data compiled by the National Association of Real Estate Investment Trusts. In September, Fidelity Investments sent a research note to clients pointing out the diversification benefits of REITs in an investment portfolio and suggesting investors think about more exposure to "commercial property through REIT stocks, particularly in multi-asset-class portfolios." Why? During the past 20 years, an allocation to REIT stocks would have boosted the risk-adjusted returns of a portfolio including U.S. stocks and investment-grade bonds, according to Fidelity. Of course, REITs sold off hard with U.S. stocks and many other asset classes during the financial crisis.
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