Gordon Pape: REITs, Emerging Markets and Reducing Risk

stock market advice

Looking to de-risk his portfolio in pandemic times, a reader asks Gordon Pape to provide an assessment of a Canadian REIT and an emerging markets ETF. Photo: boonchai wedmakawand/Getty Images

Gordon Pape advises a reader looking to de-risk his portfolio and provides an assessment of two options he’s been contemplating.


Q: My view is that the markets are hugely underestimating the dire economic and social consequences of the pandemic. I am de-risking my portfolio. I have a couple of questions.

1. Do you have a view of RioCan? It is well-run and looks undervalued, but the risks are great.

2. Any views on Emerging Markets? I have XEM, which has a lot of China/Taiwan and Korea, but also much more dubious holdings in India and Russia. Best wishes. – Doug G.

A: RioCan (TSX: REI.UN) was the largest REIT in Canada for many years and the king of the shopping mall operators. It was a recommendation of my Income Investor newsletter for years, but we sold (at a nice profit) when it became apparent online shopping was starting to steal market share from brick and mortar retailers.

The trust has been aggressively diversifying its business and the shares traded in a fairly narrow range in recent years, until they fell off a cliff in March. As I write, they are down 42.6 per cent from their 52-week high, which may be an overcorrection.

The trust reported good first-quarter results and said it is in “good financial health with a strong balance sheet, ample liquidity, staggered debt maturities and multiple sources of financing combined with a large unencumbered asset pool”.

The distribution has been maintained at $0.12 a month, which is a positive sign since several other REITs have cut payments. At the time of writing, the yield was over 9 per cent.

That’s a very attractive payout, perhaps too much so. At this level, buying units would not be a derisking tactic. It may be a smart move over the longer term, but when you see a 9 per cent yield it means there are caution lights flashing.

XEM is the trading symbol for the iShares MSCI Emerging Markets Index ETF. It also trades in New York as EEM. As the name suggests the fund holds a portfolio of stocks from Emerging Markets including the countries you mention plus Brazil, South Africa, Thailand, etc.

As of the time of writing, it is down 10 per cent year to date. The five-year average annual total return to the end of May was 1.93 per cent – not impressive when related to the risk factor.

I suggest you need to do some rethinking if you really want to reduce portfolio risk. – G.P.

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