Paper on Optimal Composition of Hybrid/Blended Real Estate Portfolios wins Nick Tyrrell Research Prize 2018
Thursday, 28 February 2019 - Travers Smith, 10 Snow Hill, London, EC1A 2AL
Closing in on the grail of open end fund liquidity
In the wake of the UK Brexit referendum, liquidity problems affecting real estate funds once again made the news headlines. Even with significant cash holdings, most open-end funds investing in the UK were unable to meet redemption demands and forced to suspend withdrawals.
One way of increasing liquidity – without adding the drag on returns caused by holding more cash – could be to hold more liquid assets, not just direct real estate and cash. The prize-winning research by Dr Frank Ametefe, Dr Steven Devaney and Dr Simon Stevenson explored this idea. It tested the potential performance of hybrid portfolios made up of direct real estate together with small amounts of government bonds and equities.
Presenting the paper at the seminar, Steven Devaney explained that including small quantities of bonds and equities together with a limited cash holding might well help. Historical data suggests this kind of hybrid portfolio’s return could have exceeded the market benchmark while still providing more liquidity than a pure real estate fund. If the main consideration is limiting the tracking error compared to the benchmark, there are benefits in holding a larger amount of cash in the portfolio. But holding a mix of liquid assets can reduce the sacrifice in return from holding cash in isolation.
Devaney noted that this kind of portfolio could go some way towards meeting the needs of institutional investors such as UK defined contribution pension funds, which use open-ended funds to gain exposure to the real estate asset class.
Introducing the seminar, Dr Paul McNamara stressed that the judges had been almost unanimous in awarding the prize to this paper, even though the overall quality among the 14 entries received from America and Asia, as well as Europe, had been very high. McNamara particularly praised the paper’s practical relevance to investment and its accessibility to the lay reader.
Paul Richards, Mercer and Dr Alexandra Krystalogianni, Allianz Real Estate led the panel discussion, lauding the quality of the research on this perennial issue. Richards did however wonder how including non-real estate assets in the portfolio could be achieved in practice, and in particular how the bond and equities investments would be made. This theme was taken up in the audience Q&A – could the investment process be made sufficiently transparent to investors, and would they think it diluted the overall real estate allocation?