Real Estate Investor Magazine South Africa July 2015 | Page 58
FOREIGN
The Benefits of Diversifing
With Global REITs
A valuable portfolio diversifier
BY GRANT LOWTON
L
isted property has provided valuable
diversification benefits when combined with
global equities to form Multi-Asset-Class
(MAC) portfolios.
It is important to consider any investment as part
of a broader portfolio. This means that a particular
investment in a Real Estate Investment Trust (REIT)
is one component of a larger listed property portfolio,
which is in itself a portion of an even wider MAC
portfolio. When a certain asset class is not highly
correlated to another, it often means that diversification
benefits can be derived from combining these two (or
more) asset classes into a broader investment portfolio.
Diversification benefits result in higher risk-adjusted
returns for investors (ie higher returns per unit of risk).
Listed property diversification benefits within a MAC
portfolio
Calculated using monthly data, the beta (a measure of
market risk) of global listed property REITs relative
to global equities over the last five years has been 0.80.
This indicates that the risk-adjusted returns of a share
portfolio can be improved through the inclusion of
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JULY 2015 SA Real Estate Investor
listed property. The results below demonstrate this has
indeed been the case
The Sharpe ratio is a measure of risk-adjusted return.
It can be calculated for each instrument, asset class, or
for an entire portfolio. It is calculated by dividing the
return in excess of the risk-free rate by the standard
deviation of these returns. The 80/20 MAC portfolio
is a theoretical portfolio consisting of 80% equities
and 20% global listed property. It is evident that
over the period under review, the 80/20 portfolio not
only outperformed the portfolio of equities, but did
so with greater efficiency (ie global listed property
outperformed equities while achieving greater return
per unit of risk).
Asset-class correlations per calendar year
The graphic on the next page shows the correlations
between global equities, listed property and bonds per
calendar year, going back to 2005. It also illustrates
the average correlations over the entire period under
review.
The chart on the next page considers asset classe