the case for listed real estate in a multi-asset portfolio
Transcription
the case for listed real estate in a multi-asset portfolio
THE CASE FOR LISTED REAL ESTATE IN A MULTI-ASSET PORTFOLIO For professional investors WHITE PAPER MAY 2016 The asset manager for a changing world The case for listed real estate in a multi-asset portfolio I May 2016 I 2 I AUTHORS Xiao Lu, CFA, is head of quantitative research of financial engineering at BNP Paribas Investment Partners in Paris, France. [email protected] Tel: +33 (0)1 58 97 75 64 Raul Leote de Carvalho, PhD, is deputy-head of financial engineering at BNP Paribas Investment Partners in Paris, France. [email protected] Tel. +33 (0)1 58 97 21 83 Majdouline Zakaria is a quantitative analyst in the financial engineering team at BNP Paribas Investment Partners in Paris, France. [email protected] Tel. +33 (0)1 58 97 20 32 Shaun Stevens is real estate strategist at BNP Paribas Investment Partners in Amsterdam, the Netherlands. [email protected] Tel. +31 (0)20 527 5123 Jan Willem Vis is chief investment officer of global listed real estate at BNP Paribas Investment Partners in Amsterdam, the Netherlands. [email protected] Tel. +31 (0)20 527 5292 May 2016 BNP Paribas Asset Management, 14 rue Bergère, 75009 Paris, France BNP Paribas Investment Partners are the source of all data in this document as at end of March 2016, unless otherwise stated. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 3 I ABSTRACT This is an expanded version of a 2015 paper which sets out to re-examine existing literature and research on the role of listed real estate as a proxy for direct real estate and the impact of listed real estate on the performance of multi-asset portfolios. Some investors have formed the view that listed real estate is an equity product that cannot accurately replicate the behavior of a portfolio of directly held buildings. The findings demonstrate that listed real estate over the long term can in fact deliver a comparable performance to direct real estate and that listed real estate has the capacity to improve the returns of a multiasset portfolio. The analysis then goes on to consider the potential for active asset managers to exploit the differences that may or may not exist within the listed real estate universe between countries, sectors and individual companies. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 4 I In this paper, we have expanded our original research into the extent to which listed real estate can act as a proxy for direct real estate1 in an investment portfolio and the positive contribution that it can make to returns from a multiasset portfolio. The analysis was expanded in Q1 2016 and reinforces the findings of our initial study. Investing in listed real estate companies has still to find a more uniform acceptance among investors generally. Our initial research set out to address investor biases. Many investors still favour investing in real estate directly or in unlisted investment vehicles despite the worldwide growth in real estate investment trust (REIT) regimes and academic research showing the benefits of investing in both listed and private real estate. Our latest research re-examines whether investors can improve the risk/return profile of their portfolios by including an allocation to listed real estate and whether listed real estate can be an effective proxy for direct real estate by delivering similar risk and return characteristics. One of the more thought-provoking points in the original white paper3 covered the respective liquidity characteristics of listed and direct real estate and the opportunities and challenges for investors that liquidity can provide at different stages of the real estate cycle. The illiquidity of direct real estate holdings is indeed one of the issues that listed real estate can address successfully. Certain segments of the real estate market which are more difficult to access due to the large amount of capital required to invest in them can become readily accessible to smaller investors when they opt for listed real estate. Even for larger investors, listed real estate can offer a wider scope for allocating, and managing, exposure to different segments of the market than would be available in a portfolio restricted to direct real estate holdings. In this paper, we have expanded the analysis with new research with the support of Jones Lang LaSalle. We explored the potential contribution that listed real estate can make to portfolio diversification, particularly as the balance between risk and reward has become more complex to manage for institutional investors. The pressure to maximise portfolio returns has risen as expected returns on risk-free assets have fallen significantly. With sovereign bond yields forced ever lower by central banks aggressively fighting declining inflation expectations, the search for alternative sources of yield among global asset allocators has intensified. 1 Direct real estate includes physical property investments and unlisted funds. 2 White paper – Zakaria M, Leote de Carvalho R, Vis J, Stevens S, The case for listed real estate in a multi-asset portfolio, February 2015, BNP Paribas Investment Partners. 3 REOCs reinvest dividends in their business. For professional investors Real estate has come increasingly into focus, an acknowledgement of its potential as an income component in overall returns. With this in mind, we assessed whether listed real estate can improve the risk and return characteristics of a multi-asset portfolio. However, investors have traditionally seen its relatively high correlation with risky asset classes such as equities over short periods as limiting its diversification potential from an ex-ante risk point of view. Despite this, the robust optimisation techniques employed in our 2015 study and repeated here show that listed real estate can provide diversification amid uncertainty over return forecasts and variance- The case for listed real estate in a multi-asset portfolio I May 2016 I 5 I covariance forecasts in a multi-asset portfolio. Moreover, in the long term, listed real estate tends to show low correlations with other asset classes and thus its diversification benefits become more naturally apparent. One of the most persistent investor criticisms of listed real estate is that over the short term, real estate stocks behave like other equities and display the same high degree of volatility associated with equity investing, while direct property markets and stock markets move independently of each other. Under this simple assumption, the direct sector is viewed as a securities portfolio diversifier, while listed real estate is not. We argue that the characteristics of listed real estate companies should allow investors to earn the performance of a direct property portfolio through owning a basket of their shares over the long term. Moreover, investors should also not overlook the underlying real estate exposure that REITs and REOCs3 provide in terms of diversification through the ownership of portfolios of multiple properties rather than investments in single properties. Listed real estate companies own, service and manage properties and collect rents and their capital expenditure, finance and development costs are similar to those of privately-owned (unlisted) real estate companies. Thus, our research sets out to explore whether direct real estate and listed real estate return correlations vary when measured over varying holding periods and also whether over longer-term holding periods, listed real estate does actually still behave like other equities. "The analysis was expanded in Q1 2016 and reinforces the findings of our initial study" Listed real estate offers opportunities for active management which cannot typically be exploited in direct real estate holdings. From a broader investment management perspective, portfolio managers can recognise the potential to generate additional uncorrelated alpha by exploiting inefficiencies in the asset class both at the bottomup and the top-down level. We investigated the extent to which inefficiencies exist in the listed real estate market for bottom-up investing, which the stock selection process can exploit. In view of the sensitivity of real estate investments to changes in interest rates and given the current market concerns that interest rates will eventually rise, our study also examines the sensitivity of listed real estate to such changes. In addition, it looks into the effectiveness of property equities as an inflation hedge over the longer term. About our research Our study considers several listed real estate indices which cover property markets in the main regions of the world, offering different levels of exposure and liquidity. The FTSE EPRA/NAREIT range, with its regional sub-indices, includes highly liquid indices widely used by listed real estate managers. They cover the most relevant real estate markets and include indices for global, US, Europe, UK, Asia and Australia listed real estate. We used a longer history of index returns provided by FTSE EPRA/NAREIT and detailed information on the composition of the indices in terms of constituents and their market capitalisation. We believe the results are in both cases representative of the listed real estate asset class as a whole. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 6 I LISTED REAL ESTATE AS A GLOBAL ASSET CLASS Is listed real estate a proxy for direct real estate? This section of the paper looks at whether and how effectively public real estate equities can act as a substitute for owning direct property. Investors continue to debate the respective benefits of owning REITs versus private market real estate. Critics like MacKinnon (2010) argue that REITs and private real estate are not perfect proxies for one another although they do acknowledge that they have some similarities. And indeed the PREA4 research acknowledged that from a risk return perspective, both forms of real estate have a role to play within a mixed-asset portfolio. Indeed, research from Ang, Nabar, and Wald (2013) found that REITs and private real estate investments had different components over the short- and medium-term but over the full real estate cycle, the differences largely disappear, and both public and private vehicles exhibit similar characteristics. Investors looking to add real estate to their portfolios may find it difficult to invest in direct real estate because of the low liquidity of the market, the high capital requirements to build sufficiently diversified portfolios, the high transaction costs and the need for skilled professionals to manage the property and all other costs and taxes associated with property management. Listed real estate offers a well sought-after alternative to direct real estate which manages to avoid these shortcomings. Oikarinen and Hoesli (2012) and Crowe and Krisbergh (2010) show that listed real estate delivers performances comparable to those from investing in direct real estate portfolios. Indeed, the returns of listed real estate companies are derived from investments in direct real estate and thus from direct real estate returns. Oikarinen, Hoesli and Serrano (2013) arrive at a similar conclusion for different segments of the real estate market in the US. Listed real estate plays an important role in particular for smaller investors by allowing them to access segments of the market which require more capital. Listed real estate also allows for a quicker access to the market avoiding the long time required for any direct real estate transaction. But even larger investors will find it useful to use listed real estate when building portfolios in order to better manage the exposure to different segments of the market and efficiently exploit different stages of the property cycle. 4 PREA: Pension Real Estate Association MacKinnon G. For professional investors Nevertheless, in the short-term, correlations between direct and listed real estate are low. This can probably be explained in great part by the rather different levels of liquidity of these two forms of real estate investment. Listed real estate is simply valued by the market on a real-time basis much like the other segments of the equity market. Listed real estate offers daily liquidity and is thus, perhaps not surprisingly, also immediately impacted by some of the same factors that impact equity market returns and related to investor demand for risky assets and to the macro-economic cycle. These factors are not as well captured by direct real estate prices, not necessarily because they do not have an impact but more likely because of the very low frequency of trades and price observations. Direct real estate has a different basis of valuation with non-listed funds and direct property valued on a much less frequent, annual, quarterly or monthly basis. The low volatility of direct The case for listed real estate in a multi-asset portfolio I May 2016 I 7 I real estate returns and low short-term correlation with risk asset returns are likely to be explained by the low frequency of price observation. Unlike listed real estate price discovery is thin, largely appraisal based and transaction evidence is scarce. Oikarinen and Hoeslis’ (2012) research into the strength of the relationship between listed and direct real estate returns in the US, Australia and UK suggests that, despite the shorter-term differences, the returns from listed and direct real estate are indeed comparable over the long-term. Their research supports a strong relationship between direct real estate returns measured from NCREIF5 and IPD6 total return indices and listed real estate returns measured from NAREIT7 total return indices. This comparison of NCREIF and NAREIT indices strongly support the hypothesis that the same underlying fundamental characteristics of direct real estate drive both listed and unlisted returns over the long term. This academic evidence supports the case for holding listed real estate as an alternative to direct real estate in the long-term. How important are dividends to return performance? "Over the long run, the contribution to total returns from reinvested dividends is clearly stronger for listed real estate than for the broader equity market" The specific structure of the underlying companies of most securities in listed real estate such as the REITs makes them more likely to pay dividends than other stocks. To keep profiting from their specific taxation framework, the unique rules that apply to REITs push them to distribute almost all their income to shareholders. In fact, in the US for example, REITs must satisfy the profit and dividend distribution requirements of Code Section 857(a) recommending the payment of at least 90% of their earnings in the form of dividends. Similar conditions are put into practice in the UK, Europe and Asia with exigencies ranging from 70 to 90% of the income to be distributed to shareholders through dividends. With real estate companies meeting the requirements, they benefit from a lighter taxation regime. Consequently, real estate stocks provide higher yield than other equities and have seen their total returns and outperformance historically coming from dividends. When compared with other stocks, many investment managers seeking income and long-term capital appreciation find listed real estate an appropriate choice. In exhibit 1 we show the decomposition of annualised average returns into price returns and reinvested dividends for listed real estate stocks in different regions using the FTSE EPRA NAREIT indices. We show the same for the equity markets in the same regions using the MSCI indices. Five different regions were considered: US, UK, Eurozone, Asia and developed countries. Over the period 1990 to 2015 nearly half of the returns of real estate stocks came from dividends, the exception being Asia where reinvested dividends contributed less to returns. Over the long-run, the contribution to total returns from reinvested dividends is clearly stronger for listed real estate than for the broader equity market in all regions. In the period, dividend yields for US listed real estate have averaged approximately 500bps compared to just 200bps for the MSCI US. For global real estate, the dividends average 400bps compared to just 200bps for the MSCI World Index. The pattern is similar for other regions, including Asia. 5 NCREIF: National Council of Real Estate Investment Fiduciaries. The NCREIF Property Index tracks the performance of unlisted real estate market in the US. 6 IPD is a subsidiary of MSCI Inc. The IPD indices track investment returns of the property markets around the world. 7 NAREIT: National Association of Real Estate Investment Trusts. The FTSE EPRA/NAREIT Index tracks the performance of global and regional listed real estate. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 8 I Exhibit 1: Decomposition of total annualised average returns into price returns and reinvested dividends for five regions: US, UK, Eurozone, Asia and developed countries. A) shows the decomposition of returns for listed real estate in these regions based on the FTSE EPRA/NAREIT indices. B) shows the same for the broader equity market in each region and is based on MSCI regional equity indices. Averages are based on annual data in local currencies from January 1990 to December 2015. Data source: FTSE EPRA/NAREIT, MSCI and FactSet. A) Annualised returns (in local currencies) for listed real estate, January 1990 to December 2015 16% 14% Reinvested dividend 5% Price return 12% 10% 8% 4% 5% 3% 4% Asia Pacific Developed 6% 4% 2% 0% US UK Eurozone B)Annualised returns (in local currencies) for equities, January 1990 to December 2015 16% Reinvested Dividend 14% Price return 12% 10% 2% 8% 4% 3% 2% 6% 4% 2% 2% 0% US UK Eurozone Asia Pacific Developed How liquid is listed real estate compared to direct property? Crowe and Krisbergh (2010) explain that given the cost of buying and selling properties and the limited liquidity of direct real estate this should be only used as a long-term investment. Anyone who has bought and sold a home, particularly in challenging market circumstances, is familiar with how illiquid direct property can be. Commercial private real estate portfolios tend to be long-term, buy-and-hold investments given the transaction times and costs involved, as portfolio managers will be constrained by the lack of liquidity. Liquidity is vital when markets suffer shocks as investors scramble to adjust their allocations to real estate to adapt to the market conditions. While it is easy to change sector or regional weights in a few days in a listed global real estate portfolio, it can take months or years in the case of a direct property portfolio. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 9 I The difference in liquidity between listed real estate and direct real estate can be illustrated by looking at how long it would take to dispose of a hypothetical EUR 1 billion direct property portfolio compared with the liquidation of a similar sized global listed real estate portfolio. Jones Lang LaSalle Inc. (JLL), a professional services and investment management company specialising in real estate, provided the data required for this exercise. In exhibit 2, we first considered the time it would take to sell a global direct real estate portfolio of EUR 1 billion of prime modern properties comprising 35% office, 35% modern shopping centers, 10% residential, 10% industrial & hotels, and 10% others. All the properties are categorised as class-A8, and located in major global or mega cities, with a regional split of 45% in North America, 40% in Asia Pacific and 15% in Europe. Then, we considered the time to sell a global listed portfolio of EUR 1 billion composed of the FTSE EPRA/NAREIT global developed index stocks at market capitalisation. Current market conditions are determined by the recent traded volume for each stock. The selling rule allows for selling a maximum of 25% of the recent average volume of each stock every day. We used the average volume estimated over the previous 20 working days and the average monthly volume estimated over the last five months. These two average volume figures are comparable and the results are the same whether we use one or another. "Listed real estate clearly offers much larger liquidity than unlisted real estate, although there are major regional variations" The direct real estate portfolio would be separated into three regional sub-portfolios and the estimated liquidation period would be six to eight weeks in optimal market circumstances, around five months in the current market conditions (March 2016) and as long as eight months in less favorable market conditions (November 2008). Our analysis suggests it would take just two days to sell 90% of the listed real estate portfolio and 10 days to dispose of it completely. Exhibit 2: Average number of days to liquidate 50%, 90% and 100% of a EUR 1billion global portfolio of listed and direct real estate in similar market conditions as from October 2015 to March 2016, local currency, monthly data. Data source: Jones Lang LaSalle Inc. and FactSet. Listed real estate Direct real estate % of portfolio liquidated 50 90 100 fastest average slowest Time required for transaction 1 day 2 days 10 days 7 weeks 5 months > 1 year Listed real estate clearly offers much larger liquidity than unlisted real estate, although there are major regional variations, with listed real estate in Europe being less liquid than in North America or Asia. We performed the same exercise using the North-American, Asian and European regional FTSE EPRA/NAREIT indices and the same assumptions. The results can be found in exhibit 3 and exhibit 4 showing that selling a EUR 1 billion portfolio in North-America would take approximately the same amount of time as for the global portfolio, which is around 10 days. For Asia, the figures are similar with 12 days needed to dispose completely of a portfolio invested in listed real estate. On the other side, a European portfolio could take slightly more than 40 days to be entirely 8 Class-A buildings represent the highest quality buildings in their real estate sub-sector compared to class B and C. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 10 I sold. In all cases, whatever the region considered, listed real estate markets show a much more attractive liquidity than direct real estate markets. Listed real estate offers an effective way to manage exposure to properties in a portfolio by avoiding the risk of illiquidity, especially during the 2008 crisis when the direct real estate market was particularly illiquid. Exhibit 3: Average number of days to liquidate listed real estate EUR 1 billion portfolios invested according to the capitalisation weighted allocation in the FTSE EPRA/NAREIT indices. The graph shows the percentage of the portfolio remaining a number of days after the selling started and allowing for selling just 25% of the average monthly volume in the previous five months for each stock. Data source: FTSE EPRA/NAREIT and FactSet, March 2016. Liquidation of EUR 1 billion listed real estate portfolios 100% 80% Global 60% North America Europe Asia 40% 20% 0% 0 5 10 15 Number of days -20% Exhibit 4: Average number of days required to liquidate completely a EUR 1 billion portfolio invested according to different capitalisation weighted FTSE EPRA/NAREIT indices. Data source: FTSE EPRA/NAREIT and FactSet, March 2016. Average number of days Global Europe North America Asia 10 40 6 12 Are listed real estate returns correlated with direct real estate and other asset classes? 9 IPD is a subsidiary of MSCI Inc. The IPD indices track investment returns of the property markets around the world. PREA: Pension Real Estate Association - MacKinnon G. For professional investors In exhibits 5, 6 and 7 we show the correlations between the returns of listed real estate and the returns of direct real estate, equities and treasuries for the US and UK respectively and between the returns of listed real estate and the returns of global equities and global treasuries. For listed real estate we used the FTSE EPRA/NAREIT for the US, the UK and Global. For direct real estate we used the NCREIF Property Index for the US and the IPD9 Index for the UK. For equities we used the S&P500 for the US, the FTSE100 for the UK and the MSCI ACWI for the Global. For treasuries we used the US 10 Year Treasury Note Index, the Citigroup UK GBI 7-10 Year Index and the Citigroup World GBI 7-10 Year Index. The case for listed real estate in a multi-asset portfolio I May 2016 I 11 I The correlations of returns plotted in exhibit 5, exhibit 6 and exhibit 7 were estimated using different data frequencies over the entire period. In exhibit 5, 6 and 7 the returns to the asset classes were calculated using quarterly data from January 1994 to December 2015. The first point in each figure is the correlation of returns of the two series at the highest frequency available. The subsequent points in each figure are average correlations calculated from data at lower frequency using all possible starting points. The lowest frequency used is 20 quarters. For the US, our analysis confirms that, while direct real estate and listed real estate appear to have lower correlations with higher frequency returns, this correlation increases for lower frequency returns, i.e. at longer-term horizons. We find similar results for the UK although convergence is slower. The correlation between listed real estate returns and equity returns does tend to be high at higher frequencies and drops as the frequency decreases, i.e. longer-term horizons. At lower frequencies, the correlations between listed real estate returns and equity returns are low for the US and UK. The results are very compelling: in the shorter-term, listed real estate tends to behave more like equity markets. However, at longer-term horizons, listed real estate market is more correlated with direct real estate. For global real estate the correlation tends to remain high irrespectively of the horizon. "Listed real estate is over longer-term horizons, clearly a diversifier of equities while offering an increasing exposure to direct real estate" The returns to bonds are highly interest rate sensitive, as it should be part of the return from listed real estate securities. Nevertheless, it is natural to expect that listed real estate should also be sensitive to what happens in the direct real estate markets. The fact is that the correlation between listed real estate and treasury returns is low, even negative, in the US, UK and at global level, and does not change even when data frequency is decreased. As exhibit 5, exhibit 6 and exhibit 7 show, the correlation rarely raises above 10%. Listed real estate is thus expected to have a diversifying role in multi-asset portfolios. Its low correlation with fixed income makes it a natural diversifier of bonds and, at least over longer-term horizons, it is also clearly a diversifier of equities while offering an increasing exposure to direct real estate. Exhibit 5: Correlations between the US listed real estate total returns and the returns to other US asset classes over different investment horizons (different return frequencies) from January 1994 to December 2015, based on USD quarterly returns. Data source: FTSE EPRA/NAREIT, S&P, Citigroup and FactSet. US asset class correlations 100% 80% 60% 40% 20% 0% -20% -40% Listed real estate vs. direct real estate Listed real estate vs. equities Listed real estate vs. bonds -60% -80% 0 12 24 Months 36 48 60 For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 12 I Exhibit 6: Correlations between UK listed real estate total returns and the returns to other UK asset classes over different investment horizons (different return frequencies) from January 1994 to December 2015, based on GBP quarterly returns. Data source: FTSE EPRA/NAREIT, FTSE, Citigroup and FactSet. UK asset class correlations 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% 0 Listed real estate vs. direct real estate Listed real estate vs. equities Listed real estate vs. bonds 12 24 Months 36 48 60 Exhibit 7: Correlations between the global listed real estate total returns and the returns to other global asset classes over different investment horizons (different return frequencies) from January 1994 to December 2015, based on USD quarterly returns. Data source: FTSE EPRA/NAREIT, MSCI, Citigroup and FactSet. Global asset class correlations 100% 80% 60% 40% 20% 0% -20% -40% Listed real estate vs. equities Listed real estate vs. bonds 0 12 24 Months 36 48 60 How diversified is global listed real estate? Direct real estate is a heterogeneous asset class with exposures to a diversity of segments, sectors and regions that drive its performance and that of listed real estate companies. The type of assets that companies own, the economic sectors they are exposed to, lease lengths in their portfolio as well as their market and sub-market locations all have differentiating impacts on portfolio and company performance. Some REITs tend to follow more secular trends while others are cyclical in nature. As a result of this diversity in property holdings and regional exposures, we can see substantial variations in performance that investors can exploit over varying time frames. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 13 I Exhibit 8: Properties owned by listed real estate companies in the FTSE EPRA/NAREIT Developed Index as of 30 September 2015. Data source: SNL Financial and FTSE EPRA/NAREIT. Number of properties owned by companies in the FTSE EPRA/NAREIT Developed Index Australia Austria 978 340 Belgium 1,368 Canada 3,916 China 524 Finland 977 France 1,955 Germany 3,094 Hong Kong Italy Japan 797 217 2,700 Netherlands 936 Norway 224 Singapore 338 Sweden Switzerland United Kingdom "Listed real estate companies in the developed markets own a total of almost 125,000 properties" 3,453 562 2,489 USA 99,945 Total 124,813 Clearly the greatest benefit from owning large and diverse portfolios of assets can be seen in the underlying exposures provided by the FTSE EPRA/NAREIT Global Index. The index provides exposure to thousands of buildings worldwide from a portfolio of global property equities and can allow investors to minimize the risk of reliance on the performance of one property, while potentially maximizing the returns through a multi-asset portfolio. As this shows, listed real estate companies in the developed markets own a total of almost 125,000 properties. Indeed, if investors are still shy of investing in listed real estate they may be underestimating the diversification benefits that this asset class can bring to a multi-asset portfolio. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 14 I THE STRATEGIC ROLE OF LISTED REAL ESTATE IN MULTI-ASSET PORTFOLIOS The evidence in the previous section supports the thesis that listed real estate can adequately substitute for direct real estate in investors’ portfolios. We next consider whether listed real estate can improve the risk and return characteristics of a multi-asset portfolio. In line with modern portfolio theory, investors should minimize risk for a given level of expected return or maximize returns for a given level of risk. Diversification is effective in minimizing overall risk as correlated asset classes are poor diversifiers. Mean-variance optimization is, however, known to suffer from assuming that future returns, volatilities and correlations can be predicted with no estimation error, which is never the case. Extreme portfolio allocations with the portfolio concentrated in just a few assets are often found from meanvariance optimization when correlated assets are considered. This is a sign that something is wrong with the forecasts used as inputs in the mean-variance optimizer and with the assumption that our returns and variance-covariance forecasts are known exactly. Robust optimization10 techniques recognize the added value of correlated assets by taking into account that neither future returns, nor volatilities nor correlations are known exactly in ex-ante. These robust techniques show that correlated assets offer diversification against the uncertainty of future outcomes and thus are still useful in a portfolio even if their impact on ex-ante risk may be negligible. 10Robust optimization is a field of optimization theory that deals with optimization problems in which certain measure of robustness is sought against uncertainty that can be represented as deterministic variability in the value of the parameters of the problem itself and/or its solution. 11A bootstrap is a computer-intensive method of estimation of parameters and distributions by resampling the original data. For professional investors Bootstrapping11 optimization is a one of the simplest forms of robust optimization that takes into account the estimation error in return and variance-covariance forecasts. This technique is based on running multiple mean-variance optimizations for different return and variance-covariance scenarios. Each scenario is built from a sub-period of the entire history of returns considered. The final portfolio is simply the average of the portfolios obtained from the mean-variance optimization for each scenario with the average returns and the variance-covariance matrix estimated over the sub-period considered. Here we considered 10,000 five-year sub-periods sampled from the history of monthly returns considered: January 1990 to December 2015. In each mean-variance optimization we looked for the portfolio allocation that maximized the Sharpe ratio under the constraints specified below. Since the volatility is not constrained in the optimization, the maximum Sharpe ratio portfolios may not have the same volatility. For a more comprehensive discussion of this optimization technique we recommend the book by Scherer (2004). We used bootstrapping optimization to find the optimal portfolio allocation which maximizes the Sharpe ratio of multi-asset portfolios for different investment universes, (global, US, EMU and UK) to integrate several client strategic objectives. We considered the impact of allowing for the portfolio to also invest in listed real estate. The other asset classes considered on a regular basis by investors are equities, bonds and commodities. Monthly returns in local currencies where used. The case for listed real estate in a multi-asset portfolio I May 2016 I 15 I • Equities: • Bonds: MSCI regional indices Government bonds < 10-year maturity Corporate investment-grade bonds • Commodities: S&P GSCI Index • Listed real estate: FTSE EPRA/NAREIT regional indices When using bootstrapping optimization, the portfolio is not subject to severe constraints. This is because bootstrapping optimization does not suffer from the drawbacks of mean-variance. As a result the portfolio is not subject to constraints that could be considered to be restrictive. The optimal portfolios are shown in exhibit 9. For each region we show two portfolios, one excluding listed real estate and one including. We find that the optimizer allocates a significant weight to listed real estate in the maximum Sharpe ratio portfolio when this asset class is allowed. In the US and EMU, the optimal listed real estate allocation comes close to 15%, and in the EMU close to 12% whereas in the UK is smaller, at 5%. In the portfolio invested in global assets the weight is close to 9%. The improvement in the Sharpe ratio of the portfolio is significant: +13% for the World and +20% for the US, for EMU and for the UK. The volatility of the portfolio investing in listed real estate is similar to the volatility of the portfolio where listed real estate is excluded, even if this latter is unconstrained in the optimization. "Including listed real estate in an allocation has the impressive benefit of improving returns drastically without increasing the volatility" Bootstrapping optimization shows that listed real estate plays an important role in multi-asset portfolios and can bring important diversification benefits over fiveyear periods. Including listed real estate in an allocation has the impressive benefit of improving returns drastically without increasing the volatility for all three regions. Listed real estate would have provided a significant diversification effect in multi-asset portfolios general stocks, bonds, and commodities in these key regions between 1990 and 2015 (1997 and 2015 for the UK). The results strongly suggest that local and global investors can increase portfolio diversification and achieve superior returns by adding listed real estate to their multi-assets portfolios. The demonstration described here is based on several assets classes that we have defined. However, it is designed to adapt to other detailed investment universes that could and should be carried out hand-in-hand with clients. Our results are in line with older research from Lee and Stevenson (2005) and Lee (2012) who found evidence that including REITs in a multi-asset portfolios provides not only diversification benefits but also improves the returns and allocate a significant weight to listed real estate. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 16 I Exhibit 9: Maximum Sharpe ratio portfolio allocation for US, UK, EMU and World portfolios with and without listed real estate derived from bootstrapping optimization. Monthly returns in local currencies. From January 1990 to December 2015 for US, EMU and World, and January 1997 to December 2015 for UK. Data source: FTSE EPRA/NAREIT, MSCI, S&P and FactSet. Maximum Sharpe ratio portfolios Global Listed real estate Equities Bonds Corporates Commodities Listed real estate MSCI World Citigroup US GBI 10Y+ Merril Lynch Global Broad Market Corp Index S&P GSCI Commodity Index FTSE EPRA/NAREIT Developed Annualised excess return (USD) Volatility of returns (USD) Sharpe ratio excluded included 19.0% 31.8% 42.7% 6.4% 0.0% 15.3% 28.2% 43.5% 4.4% 8.6% 4.9% 5.8% 0.89 5.7% 5.9% 1.01 US Equities Bonds Corporates Commodities Listed real estate Listed real estate MSCI USA Citigroup US GBI 10Y+ Merril Lynch US Corp Index S&P GSCI Commodity Index FTSE EPRA/NAREIT USA Annualised excess return (USD) Volatility of returns (USD) Sharpe ratio excluded 22.9% 27.3% 42.1% 7.7% 0.0% included 16.6% 23.5% 40.1% 5.0% 14.7% 6.0% 6.5% 0.96 7.2% 6.5% 1.15 Eurozone Equities Bonds Corporates Commodities Listed real estate Listed real estate MSCI EMU Citigroup EMU GBI 10-15 Year Merril Lynch EMU Corp Index S&P GSCI Commodity Index FTSE EPRA/NAREIT Eurozone Annualised excess return (EUR) Volatility of returns (EUR) Sharpe ratio excluded 10.9% 43.5% 40.5% 5.0% 0.0% included 5.4% 37.6% 41.5% 3.6% 11.9% 5.1% 5.2% 0.92 5.6% 5.0% 1.11 UK Equities Bonds Corporates Commodities Listed real estate Listed real estate MSCI UK Citigroup UK GBI 10-15 Year Merril Lynch Sterling Corporate Index S&P GSCI Commodity Index FTSE EPRA/NAREIT UK Annualised excess return (GBP) Volatility of returns (GBP) Sharpe ratio For professional investors excluded 11.7% 40.5% 40.8% 7.0% 0.0% 2.9% 4.8% 0.62 included 8.3% 45.8% 36.8% 3.9% 5.2% 3.2% 4.5% 0.75 The case for listed real estate in a multi-asset portfolio I May 2016 I 17 I LISTED REAL ESTATE AND MACROECONOMIC RISK How sensitive is listed real estate to interest rates? Since the outbreak of the Great Financial Crisis in 2007-2008, we have witnessed an unprecedented amount of intervention in the capital markets by global central banks, which has had a profound impact on interest rates in North America, Asia and Europe. In view of the current background of ongoing interest rate uncertainty, we considered it highly relevant to examine the performance of listed real estate under different scenarios for movements in short-term and long term interest rates. One should be forgiven for expecting listed real estate to suffer in periods of interest rate raises. After all, as seen before, listed real estate companies pay higher dividends and tend to be relatively high-yielding investments. Moreover, these companies tend to use leverage. A negative sensitivity to raising interest rates should perhaps be expected. Indeed, when the US Federal Reserve suggested it would reduce quantitative easing in May 2013, this was followed by a major sell off in US REITs and in listed real estate globally. But investors need to think beyond simply how listed real estate performs in the very short term. Rising rental rates and property prices in an improving economic environment can more than compensate for rises in interest rates over the longer run (see exhibits 10 and 11 on page 18). Direct and listed real estate also respond at different speeds to the threat of long and short-term interest rate increases. When short-term rates rise, it tends to have little impact on property cap rates because it generally signals that the economy is improving. When interest rates move, the government yield curve either steepens or flattens. In exhibit 10 we show how the US yield curve moved in the past. Gray background periods represent steepening periods whereas white background represents flattening periods. The yield curve is measured by the difference between 10 year yields and three month cash rates. Exhibit 10: US yield curve based in 10 year bond yields minus three months cash rates for the US, from January 1989 to December 2015. Steepening periods are represented with green background and flattening periods in white. Data source: FactSet. 12 Steepening periods US Benchmark bond - 10 year - yield US 10 year - US 3 month 10 8 Flattening periods US Benchmark bond - 3 month - yield 6 4 2 0 Nov.-2014 Nov.-2013 Nov.-2012 Nov.-2011 Nov.-2010 Nov.-2009 Nov.-2008 Nov.-2007 Nov.-2006 Nov.-2005 Nov.-2004 Nov.-2003 Nov.-2002 Nov.-2001 Nov.-2000 Nov.-1999 Nov.-1998 Nov.-1997 Nov.-1996 Nov.-1995 Nov.-1994 Nov.-1993 Nov.-1992 Nov.-1991 Nov.-1990 Nov.-1989 -2 For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 18 I These movements in rates occur as the economy and policy environment evolve leading to changes in interest rates as investors trade (often large) blocks of fixed income securities. Flattening and steepening can actually be divided into bear and bull periods giving rise to four different types of yield curve movements: • Bear Flattening: short-term interest rates are rising faster than long-term interest rates • Bull Flattening: long-term rates fall faster than short-term rates do, causing the yield curve to flatten as the short-term and longterm rates converge • Bear Steepening: steepening of the yield curve is caused by long-term rates rising faster than short-term rates • Bull Steepening: short-term rates fall faster than long-term rates do, causing the yield curve to steepen Exhibit 11: Average annualised total returns and volatility of listed real estate and developed equities conditioned to yield curve regimes. Monthly total returns in USD for the period January 1990 to December 2015. Source: FTSE EPRA/NAREIT, MSCI and Datastream. Annualized returns (1990-2015) FTSE EPRA/NAREIT MSCI World Global (EUR) Americas (USD) Asia (EUR) Europe (EUR) (EUR)* (USD) Bear flattening 25.8% 26.2% 23.5% 22.4% 18.9% 12.8% Bear steepening 16.4% 10.7% 17.1% 17.2% 18.5% 17.1% Bull flattening 14.2% 18.8% 10.7% 13.0% -6.4% 8.2% Bull steepening -5.7% 8.4% -3.6% -5.1% -4.8% -0.8% * Since 1998 Volatility of returns FTSE EPRA/NAREIT Bear flattening Global (EUR) Americas (USD) 12.8% 14.1% Asia (EUR) 18.2% MSCI World Europe (EUR) (EUR)* 11.6% 11.1% (USD) 10.5% Bear steepening 16.3% 13.4% 21.7% 13.7% 10.0% 10.6% Bull flattening 16.6% 15.9% 28.1% 14.3% 17.5% 16.2% Bull steepening 21.0% 27.6% 24.3% 17.3% 17.0% 18.3% * Since 1998 In exhibit 11 we show the average returns of the FTSE EPRA/NAREIT indices of different regions and compare them to the average returns of the MSCI World Index conditioned to these four movements of the US yield curve. The analysis covers the period 1990 to 2015. Periods of bull steepening were difficult not only for the listed real estate (exception for Asia Pacific) but also for global equities. Periods of bear steepening were more favorable to equities but listed real estate also delivered generous returns (although less in North America). For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 19 I Rising short-term US interest rates tend to be positive for global listed real estate, which in turn largely outperformed global equities during periods of bear flattening. Seeing real estate out-performing equities in bear flattening periods rather than bear steepening may be due to real estate firms financing themselves with long rather than short rates. Our objective was to illustrate different scenarios and evaluate the impacts for listed real estate with some assumptions and some limits identified due to the existing market environment (the lowest yield curve generating abundant liquidity for 25 years or a longer economic cycle). Can listed real estate hedge against inflation? We shall now explore if listed real estate has been effective as a hedge against inflation in the past over the long term. Glascock et al. (2002) discussed the ability of direct real estate to protect investors from loss of purchasing power. Since listed real estate is exposed to direct real estate, investing in real estate through ownership of publicly traded stocks presents a good hedge against inflation, if the effect of changes in monetary policies is put aside. In fact, the hedging effectiveness of listed real estate seems much closer to those of direct real estate than global equities. The main driver of this hedge is the income component of listed real estate returns that adjusts with inflation over the long-term. This could also be expected given the long-term correlation of listed real estate returns with direct real estate returns, which is much stronger than with equity returns as discussed earlier. "The hedging effectiveness of listed real estate seems much closer to those of direct real estate than global equities" In order to show the effectiveness of the hedge against inflation in the longer-term we chose to show to what extent the performance of listed real estate exceeds price inflation in a given period. We also compare the effectiveness of listed real estate with that of other asset classes using the same approach. We look at the effectiveness over different investment horizons: 1 year, 3 years, 5 years and 10 years and we include overlapping periods in the simulations. The success rate is defined by the probability that the average returns exceeded the average inflation rate over the investment horizon considered. We used a historical sample from 199112 to 2015 based on quarterly data. In exhibit 12 we show the results. We used: • Equities: • Bonds: • Commodities: • Listed real estate: • Direct real estate: • Inflation: S&P500 (US) STOXX600 (Europe) FTSE100 (UK) ASX200 (Australia) TOPIX100 (Japan) Citigroup Government bond 7-10 years indices S&P GSCI Index FTSE EPRA/NAREIT developed indices IPD Direct Property local indices CPI Index 12European bond quarterly data are available from 1994, and European direct real estate from 2000 on a yearly basis. We did not consider direct real estate data for Japan and Australia due to licensing issues. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 20 I Exhibit 12: Probability of out-performing inflation for different countries and at different (overlapping) horizons. Quarterly (yearly for EMU direct real estate) data based on local currency returns from 1991 (1994 for European bonds and 2000 for European direct real estate) to 2015. The highest probabilities are displayed with bold figures. Data source: FTSE EPRA/NAREIT, IPD, S&P and FactSet, March 2016. Probability of outperforming inflation Holding period Listed real estate Equities Bonds Commodities Direct real estate 1 year US EMU UK Australia Japan 79% 81% 64% 75% 53% 72% 68% 66% 61% 48% 78% 61% 78% 78% 85% 50% 52% 49% 50% 54% 82% 93% 82% 3 years US EMU UK Australia Japan 77% 80% 76% 78% 57% 63% 60% 62% 64% 47% 92% 78% 98% 99% 98% 55% 58% 53% 52% 60% 77% 75% 82% 5 years US EMU UK Australia Japan 78% 76% 71% 70% 56% 54% 41% 52% 65% 35% 99% 80% 99% 100% 100% 50% 49% 52% 54% 61% 90% 100% 74% 10 years US EMU UK Australia Japan 94% 100% 89% 58% 83% 67% 51% 63% 73% 33% 98% 69% 98% 100% 100% 69% 67% 72% 73% 88% 94% 100% 94% Listed real estate reached better results than other asset classes, with the exception of bonds, coming out on top in terms of hedging power for several regions and periods. European and Australian listed real estate exhibit the highest success rates among other assets over the four periods considered with probability of beating inflation between 75% and 100%. For the US, listed real estate provided very similar hedge against inflation to that offered by direct real estate for all holding periods with a probability of beating inflation higher than 75%. For the UK, even if listed real estate inflation protection is a rising function of the holding period, UK direct real estate appears to have the best results in terms of inflation hedging compared to other assets. On the other hand, Japan showed quite low inflation hedging success rates at around 55% for all periods, except for 10-year holding period where probability of beating inflation is higher. Commodities had a success rate reaching 88% for the 10-year period. Even though results are a function of the economy and underlying market of the country considered, listed real estate presents similar or better inflation hedging properties when compared to other asset classes when this measure of success is taken into account. For the EMU, we find that direct real estate had been a better hedge of inflation than bonds in the 1, 5 and 10-year period considered. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 21 I THE ACTIVE MANAGEMENT OPPORTUNITIES FROM INEFFICIENCIES IN LISTED REAL ESTATE The very diverse nature of listed real estate markets in terms of geography and sector suggests that investors should be able to exploit the significant differences that mark the listed real estate investment universe in terms of region, country, sector and segmental characteristics as well as individual diversity at the stock level. Depending on the depth and extent of this differentiation, managers with specialised expertise in the real estate sector should be well placed to consistently generate excess returns. The existence of top down and bottom up divergence means that managers can generate alpha by actively managing listed real estate portfolios to exploit these inefficiencies. This alpha is an excess return uncorrelated with the returns of the listed real estate market and with the returns of other asset classes. Alpha is thus highly valuable for portfolio diversification and for increasing the long-term riskadjusted returns of the overall multi-asset portfolio. How diverse is the listed real estate sector? Global listed real estate is the one of the few sectors that offers such a diverse exposure to various countries and subsectors. In fact, a portfolio invested in global real estate may represent several different property types in multiple countries. As reflected in exhibit 13 the FTSE EPRA/NAREIT is exposed to more than 10 property sectors and no less than 13 countries. Listed real estate offers exposure to properties that would have never been considered by many investors such as hotels, malls and self-storage for example. Small investors would never be able to buy such properties. But even large investors can access better diversified portfolios via listed real estate than through direct real estate. Specialised REITs also bring the adequate competence to manage such type of properties, something difficult for most investors. Listed real estate is diverse in terms of geography and sector offering opportunities for active management in different market segments. Exhibit 13: Listed real estate exposure through FTSE EPRA/NAREIT to property A) sub-sectors and B) countries on 31 August 2015. Data source: FactSet and FTSE EPRA/NAREIT. A) Sector allocation in the FTSE EPRA/NAREIT on 31 August 2015 60% 50% 40% 30% 27.0% 24.9% 20% 13.1% 12.0% 10% 7.4% 5.5% 4.2% Healthcare Industrial Hotel & Resort 6.0% 0% Diversified Retail Residential Office Other For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 22 I B) Country allocation in the FTSE EPRA/NAREIT on 31 August 2015 60% 52.7% 50% 40% 3.1% 2.8% 2.6% 2.4% 1.6% 1.1% 0.9% 0.5% 1.5% Sweden Switzerland Belgium/ Luxembourg Other 5.7% France 6.7% Singapore 7.1% Netherlands 11.5% 10% Canada 20% Germany 30% Australia Hong Kong UK Japan United States 0% Where are the potential top-down inefficiencies? In exhibit 14 we show the correlations between the returns of different listed real estate sector and country FTSE EPRA/NAREIT indices. The average of all correlations for all sectors is about 77% and for all major countries about 37% in the 25-year period considered. Lower average country return correlations make it easier to generate tracking error by actively investing in some countries in favour of others with relatively small active weights, when compared to investing in some sectors instead of others. A number of inefficiencies exist in the listed real estate market at country level. We show that a number of macroeconomic and property specific factors have predictive power for the cross section of listed real estate country returns and can be used to generate alpha: • Macro factors: Short-term rates Policy rates Inflation Consumer confidence Retail sales • Property factors Office market yields Office market vacancies As shown in exhibit 15 for the period 1992 to 2015, macroeconomic factors have been good predictors of cross-sectional country returns in the global listed real estate with information ratios as high as 0.63 for inflation. Countries with falling rates and inflation tend to outperform while countries with rising rates and inflation tend to underperform. Countries with stronger increases in consumer confidence and sales tend to outperform countries with the weakest dynamics in consumer confidence and sales. Property factors tend to be contrarian and investors should prefer countries which have gone too far. Weakest growth in yield rates and strongest growth in vacancies signal the time to overweight countries. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 23 I Exhibit 14: Pairwise correlations of returns of different FTSE EPRA/NAREIT A) sectors and B) countries based on monthly local currency returns. The period is January 1990 to February 2015. Data source: FTSE EPRA/NAREIT and FactSet. A) Sector correlations Diversified Diversified Retail Office Residential Industrial Hotels Healthcare 100% 79% 86% 76% 76% 75% 58% Retail Office 100% 91% 82% 87% 81% 75% Residential 100% 84% 100% 84% 71% 78% 73% 73% 68% Average correlation: 77% Industrial Hotels 100% 83% 71% 100% 58% "The average correlation for all major countries is relatively low at 37%" B) Country correlations USA Canada UK USA 100% Canada 54% 100% UK 59% 37% 100% Belgium 37% 27% 45% Germany 31% 18% 36% France 43% 30% 58% Sweden 36% 19% 44% Netherlands 50% 41% 56% Australia 56% 46% 48% Hong Kong 32% 30% 29% Singapore 34% 38% 33% Japan 28% 29% 30% Belgium Germany France Sweden Nether- Australia Hong Singapore lands Kong 100% 29% 56% 46% 52% 38% 22% 26% 14% 100% 44% 100% 28% 52% 100% 45% 74% 47% 100% 25% 45% 41% 52% 17% 26% 25% 31% 25% 31% 29% 36% 11% 27% 25% 25% Average correlation: 37% 100% 42% 41% 32% 100% 74% 23% 100% 31% Exhibit 15: Information ratio of macroeconomic and property specific factors in country allocation, based on the performance of long-short country portfolios. Monthly re-balancing with returns in USD. January 1992 to December 2015. Data source: Bloomberg, FTSE EPRA/NAREIT, Datastream and FactSet. Information ratio Macro factors Short term rates Policy rates Inflation Consumer confidence index Retail sales Property factors Office market yields Office market vacancy Preferred countries 0.43 0.53 0.63 0.52 0.49 Falling rates Falling rates Falling inflation Rising confidence Rising sales 0.34 Weakest growth in yield rates 0.48 Strongest growth in vacancies For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 24 I Where are the bottom-up inefficiencies? So-called factor premiums also exist in the listed real estate market. We show that value factors, in particular, need to be considered as part of the stock selection process and had significant predictive power in the cross section of listed real estate stocks in different regions. We also include some bottom up back-tests based on January 1990 to December 2015 monthly data for the FTSE EPRA/NAREIT indices. The results show the efficacy of value factors in three different regions: North America, Europe and Asia. The information ratios are positive everywhere and significant in the global universe. In Europe, all but the book per share to price ratio are significant. In Asia and the US the results are also significant. Exhibit 16: Information ratio of value factors in listed real estate based on the FTSE EPRA/NAREIT, indices of different regions based on the returns to a longshort portfolio invested in the top ranked stocks and shorting the bottom ranked stocks using quartiles. The factor strategies invest in the top ranked quartile stocks and sell short the bottom ranked quartile stocks. Cheap stocks have the highest dividend per share to price, book per share to price and earnings per share to price. Monthly rebalancing in EUR for Europe and USD otherwise. January 1990 to December 2015. Data source: Bloomberg and FTSE EPRA/NAREIT. Information ratio Value factors Dividend per share/price Book per share/price Earnings per share/price (next year forecast) For professional investors Global North America Europe Asia 0.68 0.59 0.68 0.46 0.47 0.63 0.56 0.48 0.46 0.55 0.44 0.46 The case for listed real estate in a multi-asset portfolio I May 2016 I 25 I CONCLUSIONS This white paper underscores the benefits that investing in listed real estate can bring to investors, including its role as a suitable proxy for direct real estate. By including an allocation to listed real estate, investors can improve the risk/return profile of their balanced portfolios. We believe both this extension and the original research highlight the opportunity that investing in real estate equities can offer to the broader investment community. The listed real estate sector has expanded considerably in both size and diversity over the last 15 years, but it has yet to find wider acceptance among investors. Despite the worldwide growth in REIT regimes and research suggesting that investing in a blend of listed and private real estate can offer benefits, many investors remain biased towards investing in real estate directly or in unlisted investment vehicles. One of the more thought-provoking findings from our research is that global listed real estate’s liquidity characteristics have allowed investors to continue investing in real estate despite the volatile start to 2016 in financial markets. The research confirms the liquidity advantage enjoyed by listed real estate over direct property investments, allowing investors to move in and out of markets easily and change their country and sector allocations in a matter of days rather than the months or even years it would take in the case of directly-owned property. In our view, this is a key benefit of an allocation to real estate stocks. Our research also found that listed real estate can offer similar risk/return characteristics to owning real estate directly over holding periods of five years and beyond, so we believe it makes sense for investors to substitute direct real estate in their portfolios with listed property stocks, at least partially. Real estate stocks can act as a good portfolio diversifier because over the long term, they have shown low correlations with asset classes such as general equities, bonds and commodities. They can improve investment returns in a multi-asset portfolio without materially increasing volatility, shown in our research. Finally, this study reinforces the findings of academic research conducted in recent years by many others, including the European Public Real Estate Association, into the benefits of blending listed real estate with direct real estate in overall real estate allocations. In summary, given the increased uncertainty now gripping global capital markets and economies, we believe investors could potentially earn higher returns by considering a flexible allocation to listed real estate estate, combined with an active stock selection process that pays particular attention to value factors. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 26 I REFERENCE 1 Ang, A., N. Nabar, and S. Wald. "Searching for a Common Factor in Public and Private Real Estate Returns." The Journal of Portfolio Management, Vol. 39, No. 5 (2013), pp. 120-133. 2 Crowe, S., and D. Krisbergh. "Listed property performances as a predictor of direct real estate performance." Cohen & Steers Capital Management Inc., Report for the European Public Real Estate Association (2009). 3 Glascock, J., C. Lu, and R. So. "REIT returns and inflation: perverse or reverse causality effects?" The Journal of Real Estate Finance and Economics, Vol. 24, No. 3 (2002), pp. 301-317. 4 Hoesli, M., and E. Oikarinen. "Are REITs real estate? Evidence from international sector level data." Swiss Finance Institute Research Paper, Research Paper Series No. 12-15 (2012). 5 Hoesli, M., E. Oikarinen, and C. Serrano. "Do listed real estate returns really lead private returns?" Swiss Finance Institute Research Paper, Research Paper Series No. 10-47 (2013). 6 Lee, S. "The changing benefit to the mixed-asset portfolio." The Journal of Real Estate Portfolio Management, Vol. 16, No. 3 (2010), pp. 201-215. 7 Lee, S. and S. Stevenson. "The case for REITs in the mixed-asset portfolio in the short and long run." The Journal of Real Estate Portfolio Management, Vol. 11, No. 1 (2005), pp. 55-80. 8 MacKinnon, G. "REITs and real estate: is there room for both in a portfolio." PREA Research Report, October 2010. 9 Moss, A., and A. Baum."Are listed real estate stocks managed as a part of the real estate allocation?" EPRA Research Paper (2013). 10Scherer, B. "Portfolio construction and risk budgeting." 2nd ed., Risk Books (2013), pp. 80- 142. For professional investors The case for listed real estate in a multi-asset portfolio I May 2016 I 27 I This material is issued and has been prepared by BNP Paribas Asset Management S.A.S. (BNPP AM)* a member of BNP Paribas Investment Partners (BNPP IP)**. This material is produced for information purposes only and does not constitute: 1.an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2.any investment advice. Investors considering subscribing for the Financial Instrument(s) should read carefully the most recent prospectus, offering document or other information material and consult the Financial Instrument(s)’ most recent financial reports. 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