2008_ibbotson

The Ibbotson analysis addressesthe investment benefits of publiclytraded equit y REITs only; all datacontained in the analysis arederived from, and apply only to,publicly traded securities.

2008A Look At The Ibbotson Analysis

National Association of Real Estate Investment Trusts®

REITs: Building Dividends and Diversification®

PORTFOLIO DIVERSIFICATION

THROUGH REITS

2008 Ibbotson FINAL:Layout 1 8/13/08 12:48 PM Page 2

2008eal estate investment trusts (REITs) make it possible for anyone to invest in large-scale,income-producing commercial real estate. REITs arecompanies focused primarily on owning, and mostoften operating, investment-grade real estate.Investors purchase shares of a REIT in the samemanner in which they acquire shares of other publicly traded companies.

In addition to current income and growth overtime, REITs provide investors with a strong sourceof portfolio diversification. In its widely recognizedanalysis on REITs’ role in multi-asset portfolios,Ibbotson Associates established the diversificationbenefits from investing in REITs. From conservativefixed-income investors seeking to raise theirincomes and lower their portfolio’s risk to stockand bond investors seeking to diversify away froma concentrated portfolio, REITs offer an attractiveway to answer an age-old investment question:“How can I increase my return without taking onmore overall risk?”

This pamphlet provides an overview of theIbbotson analysis and its important findings.Results of the Ibbotson analysis are contained in aPowerPoint presentation that includes a basicreview of the REIT industry, the investment characteristics of real estate stocks and the assetallocation analysis and conclusions. The presenta-tion is available from Ibbotson Associates at itsWeb site, www.ibbotson.com.

For more information on the REIT and publiclytraded real estate industry, visit www.nareit.com.

R


Ibbotson Associates, a leading authority on asset allocation, examined the

historical performance of REIT equity securities to determine if real estate

stocks provide meaningful benefits in diversified portfolios.

Starting with the rationale for investing in

diversified portfolios, Ibbotson points to

basic tenets of modern portfolio theory,

which state that each investment should

display return attributes that are

sufficiently different from those of other

investments, and each investment should

offer competitive returns over time. The

correlation of investment returns is

important in choosing investments that

are appropriate for a well-diversified

portfolio, since diversifying across such

investments should minimize overall port-

folio risk for all levels of portfolio return.

Consistent long-term performanceCompound annual total returns, 1972-2006

Ibbotson documented that REIT returns have been competitive with those of other types of investments over long investment horizons.

Since 1992, the correlation of

equity REIT returns with the

returns of other stocks and

bonds has remained relatively

low. Specifically, Ibbotson

documented low to moderate

correlation of returns from REITs

with returns from small-cap

stocks, suggesting that small

stocks are not substitutes for

the diversification benefits of

REITs.

Bonds 8.7%

Large Stocks 11.4%

Int’l Stocks 11.8%

Equity REITs 14.0%

Small Stocks 14.9%

Correlation measures the extent to which returns from different investments move together over time. Low to moderate correlation is sufficient to provide portfolio diversification benefits.

Declining Equity REIT correlation60-month rolling periods

Begin 1972End 1976

19771981

19821986

19871991

19921996

19972001

20002006

0.55

0.40

0.08

• vs. Small stocks• vs. Large Stocks• vs. Bonds

Correlation


The Ibbotson analysis uses a widely recognized mean-variance, asset allocation

process to demonstrate that REITs can raise the return and lower the risk of a

wide range of multi-asset portfolios. For example, REITs can add significant

diversification benefits to today’s 401(k) plans, which often include no real estate

investment choices.

Ibbotson constructed various portfolios with and without REIT allocations.

Whenever allocations to REITs were available, the asset allocation model

chose the maximum allowable allocation to REIT stocks to build the most

efficient portfolios, which provide the highest possible rates of return at any

given level of risk.

REITs improved returns ateach level of portfolio risk.

Investors may

improve their

portfolio

returns with

an allocation

to REITs.

Efficient portfolios without REITsConstrained optimization 1972 - 2006

Efficient portfolios including REITsConstrained optimization (20% REITs) 1972 - 2006


Ibbotson expanded its analysis to include additional asset classes not previously

considered, including small- and mid-cap stocks, emerging market stocks, high-

yield bonds and investment-grade corporate bonds. In all cases, REITs were included

in the most efficient portfolios of highest returns and lowest risk, suggesting that

these other asset classes are not effective substitutes for the diversification power

that REITs can provide.

Across the

spectrum of

portfolio risk

and return,

REITs are used

to build the

highest yielding

portfolios.

As seen in this set of portfolios,

investing 10 percent or 20 percent

in REITs both increased the

portfolio’s total return and lowered

the portfolio’s overall risk.

Efficient frontiers with and without REITsStocks, bonds, T-bills, and REITs 1988-2006

To demonstrate the benefits of

investing in REITs, Ibbotson

created sample portfolios with

various levels of allocations to

REITs.

10%

40%

50% 45%

35%

10%

10% 20%

10%

30%

40%

Return: 10.7%Risk: 10.9%Sharpe ratio: 0.42



• Stocks• Bonds• Treasury bills• REITs

Potential to reduce risk and increase returnStock and bond investors, 1972-2006

REITs raise the efficient frontier ofmulti-asset portfolios, thereby earninga place in the intelligent investor’sdiversified portfolio.

Treasury bills

Gov’t bonds

Corporate bonds

High yield bonds

International stocks

Large stocks

Mid/small stocksREITs

Emergingmarket stocks

• Portolfios with REITs• Portfolios without REITs

0% Risk 5 10 15 20 25 30 35

5

10

15

20


Ibbotson’s analysis highlighted two fundamental aspects of REIT returns: substantial

current income and moderate, long-term price appreciation that protects investors

against inflation over long investment horizons.

Besides income, the balance of

REIT total returns comes from

long-term price appreciation of the

REIT shares that an investor owns.

Over the last 25 years, REIT share

prices have more than kept pace

with the Consumer Price Index

(CPI), a common measure of changes

in the cost of living, thereby

protecting an investor’s capital from

the corrosive effects of inflation.

Over the last 20 years, approxi-

mately 7.7 percentage points of

the 14.3 percent average annual

total return of the FTSE NAREIT

Equity REIT Index came from

dividends, producing a high level

of reliable income through all

market conditions. Over the long

term, more than 50 percent of

REIT total returns have come

from dividend income.

Reliable income returnsEquity REIT annual returns, past 20 years

• Price return• Income return• Average annual income return

1987 1992 1997 2002

40%

30

20

10

0

-10

-20

-30

Equity REIT price index versus CPI1981-2006

$500

400

300

200

100

0

1981 1986 1991 1996 2001 2006

• FTSE NAREIT Equity REIT Price Index• Consumer Price Index

Ibbotson Concluded: • REITs offer an attractive risk/reward trade off

• Correlations of REIT returns with other investments have declined since 1992

• REITs may boost return and/or reduce risk when added to a diversified portfolio

• REITs are worth investigating as an addition to many types of diversified portfolios

• Small stocks and other asset classes are not substitutes for the diversification

power and income provided by REITs


“REITs offer important return and diversificationpotential and are important in stand-alone target date funds. In addition, given that mostparticipants’ other taxable wealth is in theform of stocks and bonds—assets that don’ttypically do well when inflation rises—havingmore inflation sensitive assets within their target date funds is a very important diversifier,”

– Seth Ruthen, CFA, Executive Vice President, PIMCO,

Real Estate Portfolio, January/February 2008.

“REITs allow even the smallest investors toown diversified portfolios of hundreds of properties, spread across the country or theworld.”

– James Glassman, Senior Fellow, American Enterprise

Institute,“Bargains in Real Estate Stocks,” Kiplinger’s Personal

Finance, October 2007.

“We believe almost all investors should ownREITs and listed real estate stocks .... Forinvestors without appropriate direct real estateasset allocations [which are most investors], aseparate asset allocation to commercial realestate implemented with exposure to REITsand listed real estate stocks worldwide seemsto be the best alternative.”

– Thomas M. Idzorek, Michael Barad, and Stephen L. Meier,

Ibbotson Associates and Morningstar,

“Global Commercial Real Estate: A Strategic Asset

Allocation Study,” Journal of Portfolio Management

Special Real Estate Issue, September 2007.

“Real estate is not an alternative to stocks andbonds—it is a fundamental asset class thatshould be included within every diversifiedportfolio. Equity, fixed income, cash, and realestate … are the basic asset classes that mustbe held within a diversified portfolio.”

– Robert M. Doroghazi, The Physician’s Guide to Investing:

A Practical Approach to Building Wealth.

Pension PlansSurvey data reported by The Pension Real Estate

Association (PREA) indicates investment in commercial

real estate by pension plans has been on the increase

since 2000. Illustrative of this is CalPERS, the largest

pension plan in the U.S., that increased its real estate

allocation from 8% to 10% in late December 2007. In

all, an estimated 70% of public sector pension plans

and 40% of corporate sector pension plans have

invested in real estate.

EndowmentsDavid Swensen, Yale University’s Chief Investment

Officer, who is responsible for more than $22.5

billion in endowment assets and other investment funds,

and has accumulated one of the best investment

performances among endowments in the last two

decades, says the “starting point” for a “well-diversified,

equity-oriented portfolio [that] provides a framework

for investment success” includes a target of 20% in real

estate assets, such as REITs, of the total portfolio weight.

– David Swensen, Chief Invesment Officer, Yale University

Endowment, “Unconventional Success: A Fundamental Approach to

Personal Investment” and The New York Times, Feb. 17, 2008

401(k) and Other Defined Contribution PlansThe most important investment-related trend in the

401(k) industry is the dramatic increase in the use of

asset allocation products, such as target-date funds. In

fact, data from a 2007 Plan Sponsor magazine survey

revealed that the proportion of plans offering target

date funds jumped from 46.5 percent in 2006 to 87.5

percent in 2007. Some industry experts expect that a

majority of assets in 401(k) plans will be invested in

these types of funds within the next few years. Another

2007 survey in Plan Sponsor found that "...of 24 firms

offering target-risk and particularly, target-date funds,

14, or 58 percent, currently included a dedicated

allocation to real estate.”

Here’s what

Experts are SAYING:

Here’s what

Experts are DOING:

Investing in REITs


National Association of Real Estate Investment Trusts®

REITs: Building Dividends and Diversification®

1875 I Street, NW, Suite 600 • Washington, DC 20006-5413202-739-9400, Fax 202-739-9401 • www.nareit.com

Data Sources: Small Stocks—Ibbotson Small Stock Series, represented by the fifth capitalization quintile of stocks on the NYSE for

1926-1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Stocks—

Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general;

Government Bonds—Ibbotson 20-year U.S. Government Bond Index; REITs—FTSE NAREIT® Equity REIT Total Return Index;

International Stocks—Morgan Stanley Capital International (MSCI®) Europe, Australasia, and Far East (EAFE®) Index; Treasury

Bills—30-day U.S. Treasury Bill; DJ Wilshire 4500; Russell 2000; Russell 2000 Value; Inflation—Consumer Price Index, U.S.

Department of Labor; REIT Stock Price Appreciation—FTSE NAREIT Equity REIT Price Index; Mid/Small Stocks—Russell 2500;

Emerging Market Stocks—MSCI Emerging Markets Index; High Yield Bonds—Lehman Brothers High-Yield Index; Corporate

Bonds—Citigroup Long-Term, High-Grade Corporate Bond Index.

NAREIT® does not intend this publication to be a solicitation related to any particular company, nor does it intend to provide

investment, legal or tax advice. Investors should consult with their own investment, legal or tax advisers regarding the appropriateness

of investing in any of the securities or investment strategies discussed in this publication. Nothing herein should be construed to be an

endorsement by NAREIT of any specific company or products or as an offer to sell or a solicitation to buy any security or other

financial instrument or to participate in any trading strategy. NAREIT expressly disclaims any liability for the accuracy, timeliness or

completeness of data in this publication. Unless otherwise indicated, all data are derived from, and apply only to, publicly traded

securities. All values are unaudited and subject to revision. Any investment returns or performance data (past, hypothetical, or

otherwise) are not necessarily indicative of future returns or performance. © Copyright 2008 National Association of Real Estate

Investment Trusts®. NAREIT is the exclusive registered trademark of the National Association of Real Estate Investment Trusts.

All Slides (unless noted): Copyright ©2008 Ibbotson Associates, Inc.


2008_ibbotson

Documents