Investors seem to agree with the Federal Reserve that the surges in economic growth and inflation are temporary; I am skeptical, cautions Bob Carlson, a leading growth and income specialist and editor of Retirement Watch.
Market pricing indicates most investors expect the growth rate to decline, and that slower growth will reduce inflation. I believe the markets are underestimating the prospects for continued growth and inflation.
We continue to be in a good environment for inflation hedges. Many stocks are highly valued. But stocks of quality companies selling at reasonable prices will continue to do well, as long as there is liquidity in the economy and growth continues.
Traditional bonds and cash remain unattractive. Real yields (the market yield minus inflation) haven’t been this low since World War II, leaving no margin of safety. I continue to recommend a diversified portfolio of inflation hedges, selected global stocks and preferred securities.
Our basket of inflation hedges has been doing well. Leading the way are real estate investment trusts (REITs) owned through Cohen & Steers Realty Shares (CSRSX).
The fund’s managers shape their holdings to focus on REIT sectors that are likely to do well in the unfolding economic environment. The fund made changes throughout 2020 to adapt to how the pandemic was changing the economy and commercial real estate.
Currently, the managers expect economic growth to continue as economic activity increases and more people are vaccinated. The fund has limited positions in sectors that continue to suffer, such as hotels, malls, shopping centers and office buildings. In those sectors, the fund seeks to own only the best-managed REITs that also hold the best properties.
Its top sectors now are infrastructure, health care, self-storage, industrial properties, apartments and data centers. Top holdings of the fund recently were American Tower (AMT), Public Storage (PSA), Simon Property Group (SPG), Duke Realty (DRE) and Healthpeak Properties (PEAK).
The fund recently had 38 positions, and 54% of the fund was in the 10 largest positions. CSRSX was up 27.96% for the year to date and 37.21% over 12 months.
For additional diversification, I recommend preferred securities. They have higher nominal yields than nominal bonds, and many have tax benefits that give them even higher after-tax yields than nominal bonds.
Preferred securities also tend to be less sensitive to rising interest rates than bonds. We own preferreds through Cohen & Steers Preferred Securities & Income (CPXCX).
The actively managed fund avoids the low-quality securities that make up too much of the preferred securities indexes. Its industry exposure can vary from the indexes, and it invests globally instead of restricting itself to securities in the United States.
The fund is up, 3.42% for the year to date and 7.93% over 12 months. The distribution yield recently was 3.97%.
We own a combination of REITs and preferred securities through the closed-end fund Cohen & Steers REIT & Preferred Income (RNP). The fund uses a leverage ratio of about 24% to increase income and gains.
The fund is about evenly split between REITs and preferred securities, with the holdings similar to those of the Cohen & Steers funds focused on those asset classes. The recent distribution yield of the fund was 5.28%.
RNP’s soared in popularity recently, selling at a 1.81% premium to net asset value (NAV). It has a six-month average discount of 1.76%. I don’t recommend adding to a closed-end fund when it sells at a premium, and I’ll recommend a sale if the premium rises much more.
The fund’s share price gained 5.43% in the last four weeks, though its NAV increased only 1.51%. RNP is up 28.42% for the year to date and 51.24% over 12 months.