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Creating a leverage strategy: Considerations for portfolio managers
- December 1, 2017: Vol. 29, Number 11

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Creating a leverage strategy: Considerations for portfolio managers

by Ben Walker

The real estate story of the year may very well be the shakeout in brick-and-mortar real estate as e-commerce continues its disruption. Headlines repeatedly detail bankrupt retailers who succumbed to Amazon.com Inc.’s dominance, leaving a trail of vacancies in malls and power centers across the United States. A deeper dive, however, reveals a story of leveraged buyouts and aggressive capital structures leaving retailers with no resources to adapt to a changing environment. These bankruptcies recall Georg Hegel’s famous adage: “We learn from history that we do not learn from history.”

Considering these recent events, portfolio managers should evaluate their own leverage levels and strategies. Too often, the default is to mortgage every investment at some industry-acceptable level, with the only concern being the quoted interest rate. Others may employ complex structures involving lines of credit, swaps and collateral. In contrast, portfolio managers can add significant

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