Basing investment decisions on top-down trends and ignoring valuations is a portfolio killer. Investors fret about the impact of rising interest rates or other variables and ignore valuation.
Take Australian Real Estate Investment Trusts (AREITs). Expectations of higher interest rates are a headwind for AREITs, utilities, infrastructure and other interest rate-sensitive sectors. Higher rates make their yields relatively less attractive and increase debt-servicing costs
Commentators have for the past 12 months warned investors to beware the “bond proxies”; for example, large AREITs that are have annuity-like cashflows and are bought mostly for yield. Their argument: the bond proxies outperform when rates fall and underperform when investors expect rates to rise.