German pension providers are missing out on higher returns by excluding real estate stocks from their portfolios, according to research presented at EPRA’s annual conference.
German pension providers are missing out on higher returns by excluding real estate stocks from their portfolios, according to research presented at EPRA’s annual conference.
A study by Consilia Capital found that a typical Spezialfonds (non-listed institutional real estate fund) could almost double its annual raw investment return from 2.88% to 5.42% by reallocating 30% of its resources to a ‘buy and hold’ real estate element. However, the change also increased the fund’s volatility from 1.03% to 6.53%.
The study also found that implementing a ‘trend following’ equities trading strategy, based on a 10-month moving average, increased the blended portfolio’s performance to 6.94%, with a smaller increase in volatility to 3.45%.
Researchers further examined the impact of adjusting the real estate element in a typical German pension fund made up of 65% bonds, 7% domestic equities, 7% international equities, 9% real estate and 11% alternative investments. Increasing the listed element of the real estate allocation and applying ‘trend following’ boosted the overall portfolio performance from 7.66% to 8.28%.
Alex Moss, CEO of Consilia Capital, said: ‘The improvement in performance by blending real estate stocks into a non-listed German institutional property portfolio is dramatic, for a limited rise in volatility or risk, our research shows. The additional benefits of investing in real estate equities, such as improved liquidity, the scope for strategic property-sector diversification and yield enhancement, are not reflected in these figures.’
