When stock markets bounce at unusual levels it is only natural to consider the ramifications on other parts of the institutional portfolio.
On Monday alone in the US markets, the S&P 500 fell by more than 4 percent, while the Dow Jones industrial average dropped by 4.6 percent. That sell-off, the worst day for US equities in more than six years, wiped out $1.25 trillion from the value of US stocks, per Bloomberg. The listed world partially recovered mid-week before another drop Thursday, with both the S&P 500 and the Dow both falling more than 10 percent from January 26 record highs.
But the equities frenzy has meant little chaos for real estate investors. Chief investment officers for four North American institutions, including public pension and sovereign wealth funds, are calling the week a “blip,” “unlikely to register,” “a short-term issue” and “not a tipping point.”
One CIO told us a true correction – a 10-20 percent drop in stocks – would not affect his overall fund. Not until a bear market – negative 20 to negative 35 percent – or crisis territory of more than negative 35 percent would his fund’s liquidity plan kick in. Even then, the changes would be relegated to other asset classes, with no pressure on the real asset portfolios.
The CIO of another, the $16.3 billion Hawaii Employees’ Retirement System, agreed, noting that stocks are only part of the equation used when evaluating the market. His pension fund also considers credit spreads, the relative strengths of the dollar and gold, money market spreads and other indicators of changing conditions when evaluating allocational shifts. If those signals turn negative, the fund would then rebalance solely its liquid side. “We assume that our real estate managers are continuing to look for value,” he says.
Typically, rebalancing decisions are driven by an asset allocation study that considers the expected forward returns of each asset class over the long-term, from three to 20 or more years. These studies occur annually, maybe biennially, so recent volatility would have “a very negligible impact” on expected long-term returns, a real assets public pension consultant told PERE.
Because of this horizon, a pension fund would need to experience a sustained period of excess returns or volatility to impact expectations. Those conditions would then result in the denominator effect that saw some pensions rebalancing their portfolios in the aftermath of the global financial crisis. But before the denominator effect kicked in, some pension funds could benefit from their current under-allocation to real estate, which would help them to absorb some of the change in the equities market without a need to rebalance their real estate portfolios. Americas-based institutions, for example, had an average 100 basis point spread between real estate allocations then and in 2017, placement agent Hodes Weill said in its annual Institutional Real Estate Allocations Monitor, published in October.
A storm has certainly impacted other financial markets in the last few days, but it would need to be far greater to impact allocations to bricks and mortar, considered these days to be an important part of a portfolio’s ballast, no longer its cladding. In the event of an equities sell-off, the message is: leave your property be.
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