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PERE LA: Asset allocation models are “absolutely stale”

One panelist said that allocations to real estate should be much higher than the current average of 10 percent of an overall portfolio.

Real estate remains a relatively small part of institutional portfolios, with stocks and bonds continuing to account for the majority of an investor’s holdings. That does not make much sense, according to one panelist at the PERE Global Investor Forum, held at the Omni Hotel in Los Angeles.

“When you think about, why real estate?” said the delegate, speaking during an early panel session on fund trends and investment strategies. “This has produced equity-like returns or higher than equity returns. There are start point and end point sensitivities. We don’t have a month where things come crashing down and another month where things keep going up.”

In fact, core real estate – the lowest-risk strategy in the asset class – had delivered double-digit returns over the past four years or five years. While core net real estate returns today are about half that, they are still attractive when compared to other asset classes, where returns have fallen much more substantially.

He added: “We do think real estate should not be considered in the way that it has been considered. So far, the asset allocation models that are out there are absolutely stale. “Given the volatility of the equities market, the speaker argued that there should be a much higher allocation to the asset class than the current average of 10 percent on an institution’s overall portfolio.

The speaker said that his firm also has considered debt strategies in real estate assets where it would not have invested equity. Those investments generate low double-digit returns that are “very very compelling.”

He added: “When five years have passed, people look back and they’re going to see this is the next big thing that people missed. I think those types of things are still getting left behind. It’s difficult to find them, but once you find them, you got to put the execution behind it and invest capital.”