2020 Nick Tyrrell Research Prize Winners' Webinar
9 February 2020
Core funds can play a major role in growing real estate allocations
Marking its tenth anniversary in 2020, the last Nick Tyrrell Research Prize was awarded to joint authors Jean-Christophe Delfim and Prof. Martin Hoesli, both of the Geneva School of Economics and Management, University of Geneva. As a result, Hoesli became the first to win the prize on two separate occasions.
Opening the webinar on their paper, ‘Real Estate in Mixed-Asset Portfolios for Various Investment Horizons’, Andrew Smith of Hearthstone Investments noted that it was the best among a number of papers that would have been worthy of winning the prize, combining as it did academically rigorous research with practical applicability to real life situations. While real estate’s role in the multi-asset portfolio is an evergreen topic, Smith emphasised that this paper brought an updated approach to an area often beset by the use of outdated methodology, and a breadth of coverage that is often lacking.
Hoesli explained that the objective of the paper was to examine the role that could be played by different forms of real estate – non-listed funds, direct and indirect – in mixed asset portfolios including stocks and bonds, taking the investment horizon into account. A secondary aim was to consider how including other alternative asset classes might modify the role of real estate in the portfolio. The work tested the ability of de-smoothed series to provide results close to those reached with transaction-based series, which proved possible in practice.
Based on US data from NCREIF and other index providers, the paper concluded that over long time horizons of 25 years plus, direct real estate has justified an allocation of at least 20% of a multi-asset portfolio, but that due to high transaction costs it would not have a role to play if the time horizon was less than 2.5 years.
The research meanwhile showed unlisted core funds to be ‘an excellent substitute for direct real estate’, with advantages over direct real estate for shorter time horizons. However, the model implied a minor role for value added and opportunistic funds, due to their high management fees and relatively high risk.
The paper also contradicted the conventional wisdom that REITs are a good substitute for direct real estate over the long term, instead finding that they could act as a useful complement to core funds. Alternative asset classes like commodities and hedge funds also had the potential to raise returns and reduce risk in the portfolio, but again with a subsidiary role to real estate.
Responding as a panellist, Peter Epping of Hines suggested that the finding that core funds are good substitute for direct real estate was particularly relevant now as many investors, even larger ones such as pension funds, have been finding it increasingly difficult to access real estate directly due to lack of available product and competitive market conditions.
Thushka Maharaj of JP Morgan, also on the panel, took a multi-asset perspective. She proposed that the research was particularly useful as it takes liquidity into account and puts public and private markets on the same footing. Investors are already considering real estate as larger part of their allocations given the growing uncertainty around real bonds returns and this paper gives further support to its potential role in the portfolio.
Tim Horsey