US - Blended real estate portfolios that combine one-third real estate investment trusts (REITs) and two-thirds non-listed property produce optimum risk-adjust returns, according to the National Association of Real Estate Investment Trusts (NAREIT).

The North American association has published a study on optimising risk and return in pension fund real estate portfolios, the latest in a body of research promoting the benefits of listed real estate.

It found that portfolios that combined public REITs and private real estate exhibited lower volatility than portfolios made up entirely of one or the other.

NAREIT has claimed that the research also disproves the theory that investing exclusively in core non-listed funds is the safest strategy.

Many US pension funds have increased their exposure to core funds in recent months, but the research suggests a 100% core portfolio is significantly more risky than the 'blended' model.

A hypothetical portfolio consisting of 50% core funds, 30% REITs and 20% opportunity funds would have delivered 10-20% average annual returns in nearly 60% of rolling five-year holding periods over the past 22 years, NAREIT found.

In the remaining 40% of rolling five-year holding periods, this portfolio would have produced single-digit annual returns.

An even more surprising claim is that such a portfolio would never have produced negative returns during all the five-year periods analysed, including those between 2008 and 2010.

By comparison, a portfolio of core real estate funds alone produced 10-20% average annual returns in only 40% of rolling five-year holding periods and losses in more than 20% of five-year holding periods.

Ironically, the findings coincide with the news that CalPERS, the largest pension fund in the US, has chosen to eliminate its exposure to REITs in its real estate portfolio.

NAREIT will be hoping other US pension funds pay more attention to its latest research than the latest strategy shift by CalPERS, which is seen as one of the leading lights of the US pension investment community.

Steven Wechsler, president and chief executive at NAREIT, said: "Given the risk reduction benefits and performance advantages of combining publicly traded REITs and private real estate investments, it appears pension funds could realise important advantages by reassessing their traditional reliance on private equity and other direct real estate investment."

NAREIT has also introduced a 'Real Estate Portfolio Optimizer', an interactive, software-driven tool designed to support the latest findings and help investors implement them into their strategies.

The tool calculates actual returns of more than 176,000 portfolios representing various allocations to REITs and private equity core, value-added and opportunity real estate funds.

"We hope tools like the Real Estate Portfolio Optimizer will spark essential conversations in the ongoing debate over how the American retirement fund system can achieve target returns, reduce risk and meet obligations to current and future retirees," Wechsler said.