AbstractThe
“case for property” in the mixed-asset portfolio is a topic of continuing
interest to practitioners and academics. Such an analysis typically
is performed over a fixed period of time and the optimum allocation to
property inferred from the weight assigned to property through the use
of mean-variance analysis. It is well known, however, that the parameters
used in the portfolio analysis problem are unstable through time.
Thus, the weight proposed for property in one period is unlikely to be
that found in another. Consequently, in order to assess the case
for property more thoroughly, the impact of property in the mixed-asset
portfolio is evaluated on a rolling basis over a long period of time.
In this way we test whether the inclusion of property significantly improves
the performance of an existing equity/bond portfolio all of the time.
The main findings are that the inclusion of direct property into an existing equity/bond portfolio leads to increase or decreases in return, depending on the relative performance of property compared with the other asset classes. However, including property in the mixed-asset portfolio always leads to reductions in portfolio risk. Consequently, adding property into an equity/bond portfolio can lead to significant increases in risk-adjusted performance. Thus, if the decision to include direct property in the mixed-asset portfolio is based upon its diversification benefits the answer is yes, there is a “case for property” all the time! |