Ahead of GICS Change, Mutual Funds Underweight REITs

Many actively managed large-cap mutual funds are underweighted to the REIT industry ahead of the sector's elevation to its own category in the Global Industry Classification Standard on Aug. 31.

The pending carve out of the new REITs GICS Sector classification by S&P Dow Jones Indices and MSCI will take effect after market close on Sept. 16, when S&P conducts the annual rebalancing of its indexes. After the change, investors will have a better understanding of the exposure — or lack thereof — that their funds have to REITs, much like health care or utilities. The increased attention is expected to push portfolio managers to initiate new positions or broaden their existing REIT holdings. Currently, investors are relatively blind to the exposure a fund has to industries without their own classifications, such as biotechnology, gas utilities and REITs.

Based on assets under management, just two of the 20 largest U.S. large-cap core mutual funds with REIT exposure were weighted to the sector by more than the 2.9% registered by the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index.

Investors are relatively blind to the exposure a fund has to industries without their own classifications, such as biotechnology, gas utilities and REITs.
Fidelity Strategic Dividend & Income Fund (FSDIX), a $4.41 billion portfolio, had a 15.3% weighting to the REIT industry, the highest among the group, according to Thomson Reuters Lipper data. Meanwhile T Rowe Price Dividend Growth (PRDGX) had a more modest 3.99% weighting in REITs. However, these funds were the exception.

JPMorgan US Equity Fund (JUEAX) has $12 billion in assets, but just 0.84% is in the soon-to-be-elevated sector. JUEAX is constructed based on proprietary stock valuation rankings, but sector weightings tend to be closely aligned with the S&P 500 index.

At the end of April, financials were 16% of JUEAX's assets, in line with the S&P 500. Wells Fargo and Chubb were among the portfolio's 10 largest holdings, while the fund held smaller stakes in AvalonBay Communities, Prologis and SL Realty Corp.

Fidelity Strategic Advisers Core Fund (FCSAX) had 1.22% of its $23.8 billion in assets in REIT securities. The fund, which recently held positions in other mutual funds, such as Fidelity Spartan 500 Index Fund (FXSIX), had 18 small stakes in REITs. The largest positions were in American Tower, AvalonBay, Crown Castle International and Simon Property Group, but office REITs such as Cousins Properties and Mack Cali Realty were also represented. Given its familiarity with REITs, Fidelity could increase its weightings to the sector when the GICS change is implemented.

Other portfolios with minimal exposure to REITs include Clearbridge Appreciation Fund (SHAPX), and Oppenheimer Main Street (MSIGX). These portfolios have 1.48% and 1.67% in REITs, respectively.

S&P Global Market Intelligence will be hosting a video webcast on June 22 regarding preparing for the elevation of the REIT industry to a new GICS sector. Register for the event here.

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