Let’s begin with a massive over simplification. There are essentially 3 parts to the real estate market. There is building homes and buildings. There is paying for homes and building. And there is buying and selling homes and buildings (and/or holding and not selling homes and building hoping for price appreciation).
For each area, there’s a fund for that. To wit, we will look strictly at the Fidelity family of Funds (although there are ETF alternatives listed as well).
| Ticker | Name | ETF Alternative |
| FGMNX | Fidelity GNMA Fund | MBB |
| FRESX | Fidelity Select Real Estate | VNQ |
| FSHOX | Fidelity Select Construction&Housing | XHB or ITB |
Figure 1 – Real Estate related sector funds
One alternative is to split dollars 1/3 each and rebalance once a year. This generates the results listed in Figures 2 and 3.
Figure 2 – Equal Split Portfolio (FGMNX/FRESX/FSHOX) Growth of $1,000; 12/31/1986-11/30-2019
| Measure | Result |
| Average 12 mos. % +(-) | +10.3% |
| Median 12 mos. % +(-) | +11.6% |
| Std. Deviation % | 12.1% |
| Ave/Std Dev | 0.86 |
| Worst 12 mos. % +(-) | (-34.6%) |
| Maximum Drawdown % | (-43.9%) |
| Average 5-Yr. % +(-) | +65.8% |
| Worst %-Yr. % +(-) | (-11.6%) |
| $1,000 becomes | $21,731 |
Figure 3 – Equal Split Portfolio (FGMNX/FRESX/FSHOX) Results; 12/31/1986-11/30-2019
Adding in The Seasonal Element
What the simple 33% each approach fails to consider is the seasonal nature of these markets. The construction sector tends to perform best between November and April, the overall real estate sector tends to perform well between March and July (also December) and the mortgage backed security sector tends to perform best between May and October.
So let’s consider an alternative that takes these tendencies into consideration.
| Months | FGMNX | FRESX | FSHOX |
| November-April | 20% | 20% | 60% |
| May-October | 80% | 20% | 0% |
Figure 4 – Annual Allocations
So to be clear:
*On October 31st we put 60% into construction and 20% each into Real Estate and Mortgage-Backed Securities
*On April 30th we put 80% in Mortgage-Backed Securities and 20% into Real Estate
This generates the results that appear in Figures 5 and 6
Figure 5 – Seasonal Split Real Estate Strategy (FGMNX/FRESX/FSHOX) Results; 12/31/1986-11/30-2019
| Measure | Result |
| Average 12 mos. % +(-) | +14.1% |
| Median 12 mos. % +(-) | +13.6% |
| Std. Deviation % | 11.7% |
| Ave/Std Dev | 1.20 |
| Worst 12 mos. % +(-) | (-23.1%) |
| Maximum Drawdown % | (-32.2%) |
| Average 5-Yr. % +(-) | +94.5% |
| Worst %-Yr. % +(-) | +5.2% |
| $1,000 becomes | $69,681 |
Figure 6 – Seasonal Split Real Estate Strategy (FGMNX/FRESX/FSHOX) Results; 12/31/1986-11/30-2019
This “strategy” is obviously not without risks – as highlighted by the “Worst 12-mos” of -23.1% and the “Maximum Drawdown %” of -32.2%. However, a quick glance at Figure 7 reveals that the maximum drawdown occurred during the 2007-2009 real estate/financial panic when just about everything (except long-term treasuries endured a roughly similar fate). Excluding that period, drawdowns have only exceeded -11% two times.
Figure 7 – Seasonal Split Real Estate Strategy Maximum Drawdown; 1986-2019
The Seasonal Split Real Estate Strategy has generated a higher annual return with lower volatility and lower drawdowns than the “split approach.” The bottom line is that seasonality is a potential “edge” that most investors never consider.
Figure 8 displays year-by-year results (2019 is through the end of November) for the Seasonal Split Real Estate Strategy
| Year | % +(-) |
| 1988 | +22.9% |
| 1989 | +17.9% |
| 1990 | +16.2% |
| 1991 | +35.7% |
| 1992 | +20.5% |
| 1993 | +13.7% |
| 1994 | (-4.0%) |
| 1995 | +20.3% |
| 1996 | +13.7% |
| 1997 | +13.8% |
| 1998 | +21.5% |
| 1999 | (-1.2%) |
| 2000 | +16.8% |
| 2001 | +24.0% |
| 2002 | +16.9% |
| 2003 | +11.5% |
| 2004 | +20.2% |
| 2005 | +3.7% |
| 2006 | +18.8% |
| 2007 | (-6.5%) |
| 2008 | (-3.5%) |
| 2009 | +23.4% |
| 2010 | +37.0% |
| 2011 | +16.5% |
| 2012 | +21.2% |
| 2013 | +7.8% |
| 2014 | +12.2% |
| 2015 | +3.7% |
| 2016 | +7.4% |
| 2017 | +12.7% |
| 2018 | -(8.0%) |
| 2019 | +24.1% |
Figure 8 – Seasonal Split Real Estate Strategy Year-by-Year Results
Summary
Is this anyway to invest in the real estate sector? Well, it’s one way. As always what is presented here is for “informational purposes only” and investors are strongly encouraged to do their own homework before adopting any investment strategy
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
