According to a Janus Henderson portfolio optimization study, the average investor should consider allocating 10% of a balanced investment portfolio to global REITs, as the asset class can provide valuable income and defensive growth characteristics¹.

Key Takeaways

• In our opinion, investors should consider global REITs for three key reasons: income, diversification and liquidity.
• Over the long term, REITs have exhibited low correlation with bonds and equities and provided a cost-efficient way for investors to access global real estate markets.
• REITs also have defensive characteristics, often investing in companies whose tenants have long-duration leases, which can help provide stability through an economic cycle.

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Why consider adding Global REITs to a balanced investment portfolio?

Guy Barnard: I’d highlight three key reasons for investors to look at global REITs as part of a balanced portfolio allocation. The first is income. Global REITs offer a dividend yield and have demonstrated ability over time to grow this in excess of inflation².

The second point I would highlight is diversification. Global REITs have a low correlation with both bonds and equities over the long term³ and, in addition, are providing you to exposure across many different countries, sectors and thousands of individual real estate assets. Now, this is diversification that is very hard to replicate in most other forms of real estate ownership.

And the final point I would make is around liquidity. Now the REITs sector itself has grown tremendously over time, with a free-float market cap [capitalization] in excess of $1.5 trillion⁴. So this should give investors comfort that they can access global real estate markets in a cost-efficient manner.

How much should investors consider allocating to REITs?

Greg Kuhl: We have undertaken a portfolio optimization study that goes back over two economic cycles, more than 20 years. The analysis includes a sampling of asset classes that we find in real-world investor portfolios across equities, fixed income and alternatives. The goal of our analysis was to determine what portfolio allocation over that timeframe would have generated the highest risk-adjusted return, the highest Sharpe ratio. What we found is that the portfolio that did have that best risk-adjusted return had a 10% allocation to global real estate⁵.

If you study the data a little bit more closely, what you find is that REITs really tend to perform well and benefit the portfolio in periods of drawdown, or generally stress periods⁶; REITs tend to outperform other asset classes. To us, that makes perfect sense because we view the key components of real estate as lower correlation with other asset classes⁷, high current income and defensive growth.

What advantages, if any, do REITs offer in an aging business cycle?

Tim Gibson: Real estate is a real asset class, so it’s connected and linked to the underlying economy. We are, after all, the landlords of the economy. The advantages for REITs: So, they have long-duration leases, which can act as a shock absorber and help smooth economic cycles. REITs also provide a stable and, in today’s case, actually a growing dividend yield. So as we have headwinds of debt, deflation and falling interest rates, this means that REITs can offer defensive characteristics.

 

Notes:
1. Source: Janus Henderson Investors as at June 2019. Based on analysis of asset class weights and risk/return characteristics in an optimal portfolio (maximum Sharpe ratio) when the FTSE EPRA Nareit Developed Index is included/excluded from the baseline balanced market portfolio.

2.Source: https://www.reit.com/news/blog/market-commentary/reits-and-inflation-protection, 1 October 2019.

3. Source: EPRA, monthly statistical bulletin, 36 month rolling data, 1997-2019, as at 30 June 2019.

4. Source: Bloomberg as at 30 June 2019.

5. Source: Janus Henderson Investors as at June 2019. Based on analysis of asset class weights and risk/return characteristics in an optimal portfolio (maximum Sharpe ratio) when the FTSE EPRA Nareit Developed Index is included/excluded from the baseline balanced market portfolio.

6. Over the long term, REITs have been less volatile than the general market (global equities) meaning they have been less subject to general market movements. Source: Janus Henderson Investors, Factset. FTSE EPRA NAREIT Developed Total Return Index (global REITs) versus MSCI World Index (equities) from June 2010 to June 2019. Past performance is not an indicator of future performance. The case for REIT outperformance late in the business cycle, https://www.reit.com/sites/default/files/media/PDFs/Research/C_S_REIT_Late_Cycle.pdf, February 2019.

7. Source: Bloomberg, MSCI, S&P Citigroup, 30 June 2019. MSCI Global Equities Total Return Index, BofA Global Corp Index, FTSE EPRA / NAREIT Global Total Return Index. Index values rebased to 100 on 30 June 2004.

Unless otherwise indicated, the source for all data is Janus Henderson Investors as of the publishing date of this video.