Ibbotson: Build Real Estate Into Investment Portfolio

September 17, 2003 (PLANSPONSOR.com) - Plan sponsors looking to construct long term returns for their participants should consider real estate as a core portfolio asset, according to a new report.

This contention is built around research conducted by Ibbotson Associates that determined expected annual returns were as much as 0.27% higher in portfolios that included both Real Estate Investment Trusts (REIT) and direct real estate equity, than in portfolios with no real estate allocation over a period that stretched from 1987 to 2001.

To further support this argument, Ibbotson developed three portfolio allocations during a 30-year examination (1972 to 2002):

  • 50% stocks; 40% bonds; 10% treasury bills
  • 45% stocks; 35% bonds; 10% treasury bills; 10% REITs
  • 40% stocks; 30% bonds; 20% REITs; 10% treasury bills.

During this time frame, the research showed that folding in REITs to a diversified investment portfolio increased the total return by as much as 0.50% at most risk levels.   For the first allocation, the portfolio had a 10.9% risk level and a 10.8%, compared with a 10.5% risk and 11.0% return in the second portfolio and 10.2% risk and 11.3% return in the third.

“Real estate should be viewed as a core asset. Pension plans and other institutions have recognized this fact for many years and have capitalized on direct real estate equity and REITs for dividends and diversification,” explained Michael R. Grupe, National Association of Real Estate Investment Trusts (NAREIT) senior vice president for research and investor outreach.. “Real estate stocks remain the best way for the average American to gain the same benefits.”