Enhanced Diversification

Real Estate in a Diversified Portfolio

Integrating commercial real estate into a portfolio of stock and bond investments may actually improve overall returns without adding risk. This is demonstrated by comparing the historical returns and risk (standard deviation of returns) of two hypothetical portfolios (see Figure A below), one with no real estate exposure and one with a 10% allocation to real estate.

2-Circle Chart Illustrating Risk
Figure A

Diversification Benefits

Modern portfolio theory suggests that the most effective way to maximize returns while at the same time minimizing risk is to add uncorrelated assets. Within the context of a multi-asset portfolio (composed of stocks, bonds, and other asset classes), commercial real estate may provide significant benefits, as correlations with stocks and bonds over time have been low.

As illustrated by its performance over the past 15 years (see Figure B below), commercial real estate has historically demonstrated low (or in some cases, negative) correlations to stocks, bonds, and other traditional investment classes, adding stability to overall portfolio returns

Correlation Table
Figure B

Going Global to Enhance Portfolio Diversification

Having the flexibility to invest across international markets may help in further mitigating investment risk, as growth rates – and economic cycles – vary significantly from country to country. Diversifying internationally may also serve to enhance long-term returns by enabling the fund to capitalize on the strengths of local property markets, while avoiding weakness in others.