Title: Real estate allocation: an evaluation of Australian superannuation fund's optimal property allocation using eleven mixed asset portfolios
Abstract: Property is a key investment asset class that offers considerable benefits in a mixed-asset portfolio. Previous studies have concluded that property allocation should be within the 10-30% range and that higher allocation to property significantly enhances the multi-asset portfolio risk-adjusted return profile. However, there seems to be wide variation in theory and practice. Historical Australian superannuation data (APRA 2015; 2007, p.57) shows that the level of allocation to property asset class in institutional portfolios has remained constant in recent decades, restricted at 10% or lower. This is seen by many in the property profession as a subjective measure and needs further investigation. To do this, the research compares the performance of the A$325 billion industry superannuation funds' strategic balanced portfolio against ten different investment strategies.
The analysis used 17 years (1995-2011) of quarterly data covering seven benchmark asset classes, namely: Australian equities, international equities, Australian fixed income, international fixed income, property, cash and alternatives. Property provided the second highest risk-adjusted return profile (0.21) behind the alternative asset class (0.44). The selected passive and active asset allocation models are set within the standard Modern Portfolio Theory (MPT) framework, using Australian government 10 year bonds as the risk-free rate. The ten different asset allocation models perform as well as the industry fund strategic approach. The empirical results show that there is scope to increase the property allocation level from its current 10% to 26%. Upon excluding unconstrained strategies, the recommended allocation to property for industry funds is 17% (12% direct and 5% listed). This high allocation is backed by improved risk-adjusted return performance.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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