MANAGING PERFORMANCE &
RISK THROUGH BLENDED GLOBAL
INVESTMENT STRATEGIES
Mark Clacy-Jones, Head of Applied Research, Real Estate, MSCI
ERES Annual Conference, Istanbul, June 2015
© 2015 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.
AGENDA
• Driving forces for Blended Strategies
• Routes for Accessing Real Estate
• Dataset Construction
• Use Cases by Investment Mandate / Investor Type
• Further Work & Conclusion
2
DRIVING FORCES FOR BLENDED STRATEGIES
Globalisation of Real Estate
• Capital Flows
• Diversification
Fund Size
• Large getting larger whilst smaller funds need liquidity & diversification
Regulation
• Solvency II, etc.
Defined Benefit & Defined Contribution Pensions
• Need for increased liquidity
3
DRIVING FORCES IN GLOBAL REAL ESTATE – ASSET ALLOCATION
Asset allocations across regions. 40:40:20 has replaced 60:40
Global
Regional
Note: Based on 138 asset owners in Survey Universe.
Calculated on % of assets
in each category, not number of asset owners.
Source: MSCI
4
DRIVING FORCES IN GLOBAL REAL ESTATE – ALTERNATIVES
Real Estate is the favoured “alternative” asset in all markets except USA
Global
Regional
Note: Based on 138 asset owners in Survey Universe.
Calculated on % of assets
in each category, not number of asset owners.
Source: MSCI
5
DRIVING FORCES IN GLOBAL REAL ESTATE – HOME BIAS
2013 estimates of Pension Fund Domestic and Foreign exposure for Equities,
Bonds and Real Estate, across major countries
Equities
Real Estate
Bonds
(Domestic Avg: 43%)
90%
13%
80%
60%
50%
93%
87%
47%
53%
40%
62%
61%
70%
8%
90%
92%
21%
36%
79%
39%
64%
61%
56%
40%
44%
70%
30%
38%
95%
19%
10%
81%
30%
70%
5%
7%
98%
Foreign
(Domestic Avg: 83%)
(Domestic
Avg: 79%)
2%
100%
Domestic
64%
36%
61%
39%
30%
20%
10%
Note: Based on 138 asset owners in Survey Universe.
Calculated on % of assets
in each category, not number of asset owners.
Source: MSCI
US
UK
Switzerland
Japan
Canada
Australia
US
UK
Switzerland
Japan
Canada
Australia
US
UK
Switzerland
Japan
Canada
Australia
0%
6
DEFINED BENEFIT TO DEFINED CONTRIBUTION PENSIONS
Asset allocation 2013
DB/DC Split 2013
1 DC assets in Switzerland are cash balance plans and are excluded from this analysis.
Source: Towers Watson and secondary sources
7
ROUTES FOR ACCESSING REAL ESTATE
Direct Real Estate
Listed Property Company Shares (REITs, etc.)
Unlisted Real Estate Funds
Real Estate Debt
Derivatives
8
SPECTRUM OF INVESTMENT BEHAVIOUR
9
ADDITIONAL VOLATILITY FOR DIRECT PROPERTY
10
RISK & RETURN TRADE OFFS
11
RISK & RETURN TRADE OFFS
Risk/Return by Investment Style
(USA 2003-13)
Note: Core based on IPD & NCREIF NPI; Core Funds based on PREA/IPD & NCREIF ODCE. Value Add and Opportunistic via Hodes
and Weill. Sources: MSCI; Hodes and Weill
12
CORE FUND PERFORMANCE IS DIRECT REAL ESTATE
% pa
Direct
Core Funds
25%
20%
25%
15%
R² = 0.9783
20%
10%
15%
5%
10%
5%
0%
0%
-10%
-5%
-5%
0%
5%
10%
15%
20%
25%
-5%
-10%
-15%
-15%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-10%
Note: Core based on IPD & NCREIF NPI; Core Funds based on PREA/IPD & NCREIF ODCE. Value Add and Opportunistic via Hodes
and Weill. Sources: MSCI; Hodes and Weill
13
GLOBAL DATA AVAILABILITY
Direct Real Estate - MSCI, NCREIF
Unlisted Funds - MSCI
Listed Real Estate – MSCI, FTSE/EPRA/NAREIT, Thomson Reuters GPR
Debt - ???
Derivatives - IPD Futures, MSCI Liquid Real Estate Indexes, FTSE Pure Property
Indices
For simplicity, analysis focuses on blending direct & listed real estate exposure
14
MSCI’S GLOBAL COVERAGE OF DIRECT PROPERTY
15
DIVERSIFICATION THROUGH NATIONAL DIRECT PROPERTY
16
NATIONAL PERFORMANCE AND MARKET SIZE EXPLAIN
CONTRIBUTIONS TO GLOBAL PERFORMANCE
17
QUARTERLY GLOBAL DIRECT PROPERTY DATASET
Use best available quarterly open-market valued data for each country available
IPD Quarterly Property Indexes
• Australia, Canada, Ireland, Japan, Netherlands, New Zealand, UK, USA
National Property Indexes from IPD Global Property Fund Index
• Belgium, Czech Republic, Hungary, Finland, France, Germany, Italy, Poland,
Spain, Sweden
IPD Transaction Linked Indexes
• Denmark, Norway, Switzerland
Covers 85% of IPD markets by value and 90% of IPD Global Annual Property Index
18
QUARTERLY GLOBAL DIRECT PROPERTY DATASET
85% of measured
global market
represented on a
quarterly basis
Balance between
small sample sizes
& open market
quarterly
valuations
Country
Index
USA
UK
Japan
Germany
France
Canada
China
Hong Kong
Australia
Switzerland
Sweden
Netherlands
Singapore
Italy
Spain
Finland
South Korea
Belgium
Denmark
Norway
South Africa
Poland
Austria
Ireland
Taiwan
Portugal
Malaysia
New Zealand
Czech republic
Thailand
Hungary
Indonesia
Quarterly Direct
Quarterly Direct
Rolling Annual Direct
GPFI
GPFI
Rolling Annual Direct
222.3
217.8
112.2
3.4
3.7
107.8
3,913
9,746
3,245
117
95
2,325
Rolling Annual Direct
TLI
GPFI
Quarterly Direct
117.2
75.1
0.8
26.9
1,339
4,417
GPFI
GPFI
GPFI
0.2
0.4
0.2
12
22
8
GPFI
TLI
TLI
0.6
11.9
14.0
23
688
478
GPFI
1.5
100
Quarterly Direct
4.8
361
9.8
0.3
570
20
0.3
19
Rolling Annual Direct
GPFI
GPFI
CV ($bn) No. Assets Market Size ($bn) Market Weight (%)
2,628
2,375
682
642
390
363
298
353
282
215
196
153
134
141
111
66
61
57
55
52
46
41
34
33
27
26
24
25
18
16
16
9
10
34.2
9.8
9.2
5.6
5.2
4.3
5.1
4.0
3.1
2.8
2.2
1.9
2.0
1.6
1.0
0.9
0.8
0.8
0.7
0.7
0.6
0.5
0.5
0.4
0.4
0.4
0.4
0.3
0.2
0.2
0.1
0.1
19
LISTED REAL ESTATE DATA
Many options for global listed property indexes
• FTSE/EPRA/NAREIT, Thomson Reuters/GPR, MSCI, etc.
MSCI ACWI REIT Index chosen
• Uses MSCI / S&P Global Industry Classification Standard (GICS)
• Free float adjusted market capitalisation
• Represents 85% of global equity REITs universe
• Around 70 constituents from 46 countries (23 developed & 23 emerging markets)
20
DIFFERENT FUND MANDATES & SIZE
Sovereign Wealth Funds & Large Defined Benefit Pension Funds
•
Large with long term investment horizon
•
Large direct holdings
Smaller Defined Benefit Pension Funds
•
Small with long term investment horizon
•
Larger unlisted fund & listed holdings
Defined Contribution Pension Funds – Large with long term investment horizon but need for liquidity
buffer
•
Large direct holdings but increasing need for listed component
Commingled Fund (Institutional or Retail) – More variety in terms of size & investment horizon
•
Smaller funds likely to use listed exposure as the best way to get geographical diversification
21
LISTED & DIRECT RETURNS COMPARED
22
BLENDED PERFORMANCE BY MARKET SIZE WEIGHTS
23
DIFFERENT BLENDS PRODUCE DIFFERENT RETURNS
Direct/Listed
Std Dev TR (%pa)
100% Direct - 100:0
2.1
4.5
90:10
2.6
4.0
80:20
3.4
3.5
70:30
4.3
2.9
60:40
5.3
2.3
50:50
6.3
1.6
40:60
7.4
0.8
30:70
8.4
0.0
20:80
9.5
-0.8
10:90
10.6
-1.7
100% Listed - 0:100
11.6
-2.6
…and
different
levels of
risk
24
RISK-RETURN PROFILE: 2006-2014
25
RISK-RETURN PROFILE: 2007-2009
26
RISK-RETURN PROFILE: 2009-2014
27
SWITCHING STRATEGIES THROUGH THE CYCLE
Total
Return of
18.1% pa
available
“Passive”
market
weight
provides
2.6% pa
Switching
on an
annual
basis with
perfect
foresight
provides
10.4% pa
28
FURTHER RESEARCH
MSCI to develop blended index
• Consultation on sensible blend(s) for publicly available index
Impact analysis of leverage on blended performance
More analysis on switching between listed & direct & listed & other liquid assets
Analysis on regional strategies & mixtures of national markets
Comparison of global blended performance against domestic direct performance
Construction of longer time series
29
CONCLUSIONS
• Globalisation of real estate investment is a major driving force behind innovative
blended strategies
• Large funds can now access global diversification benefits through multiple
channels
• Listed real estate is a good way for smaller funds to access global returns
• Listed real estate gives liquidity benefits but at the cost of increased volatility
• Understanding both listed & direct dynamics can lead to outperformance
30
CONTACT US
AMERICAS
Canada
+ 1 416 687 6284
US
+ 1 212 804 3900
EUROPE, MIDDLE EAST &
AFRICA
ASIA PACIFIC
UK
+ 44 20 7336 9200
Australia
+ 61 2 9248 1900
France
+ 33 1 58 05 36 90
Japan
+ 81 3 5211 1455
Germany
+ 49 691 3385 999
Netherlands + 31 88 328 22 00
Spain
+ 34 917 610 271
South Africa + 27 11 656 2115
Sweden
+ 46 8 400 252 30
msci.com
realestate@msci.com | + 44 20 7336 4783
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