Analysis shows REITS can boost portfolio

Adding REITs to a wide selection of diversified portfolios, including those with expanded investment choices, boosted compound annual total returns by 50 to 60 basis points annually when compared with non-REIT portfolios from 1988 through 2004, according to Ibbotson Associates.

Ibbotson, a provider of asset allocation tools to the financial services industry, was commissioned by the National Association of Real Estate Investment Trusts to update its widely recognized work of 2001 by including additional asset classes not previously considered, including small- and mid-cap stocks, emerging market stocks, high-yield bonds and investment-grade corporate bonds.

“In all cases, REITs were included in the most efficient portfolios of highest returns and lowest risk, suggesting that these other asset classes are not effective substitutes for the diversification power that REIT stocks can provide,” said Michael R. Grupe, NAREIT’s senior vice president for research and investment affairs, in an NAREIT news release.

The Ibbotson analysis uses mean-variance optimization to show that REITs can raise the return and lower the risk of a wide range of multi-asset portfolios. For example, REITs can add significant diversification benefits to 401(k) plans, which often include no real estate investment choices.

Since 1992, the correlation of equity (property-owning) REIT returns with the returns of other stocks and bonds has declined significantly, NAREIT stated.

“In particular, Ibbotson documented low to moderate correlation of returns from REITs and small-cap stocks, suggesting that small caps are not substitutes for the diversification benefits of REITs,” Grupe said.

Ibbotson’s analysis highlighted two aspects of REIT returns: high, stable current income and moderate, long-term appreciation that protects investors against inflation and preserves capital over long investment horizons.

Allocating 20 percent to REITs in Ibbotson’s sample portfolios both increased the total return and lowered overall risk, according to Grupe.

“REITs are worth investigating as an addition to many types of diversified portfolios,” he added

The National Association of Real Estate Investment Trusts represents U.S. real estate investment trusts and publicly traded real estate companies worldwide. Members are REITs and other businesses that own, operate and finance income-producing real estate, as well as those firms and individuals who study and service those businesses.

[[In-content Ad]]