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Nearly 40 million Americans invest in REITs

Wilshire Explores Role of REITs in Target Date Funds

04/02/2012 | By Ron Kuykendall

NAREIT announced that new research by Wilshire Funds Management, a business unit of Wilshire Associates ("Wilshire®"), offers target date fund (TDF) managers a better way to build their 401(k) and other retirement portfolios. Additionally the research found that REITs boost returns and reduce risks for retirement savings. TDFs are popular investment products designed to simplify 401(k) or IRA portfolio planning for millions of Americans now responsible for their own retirement planning. Over the next decade, the vast majority of retirement assets are expected to be invested in TDFs and other asset allocation products.

Wilshire found that a TDF portfolio including U.S. REITs would have produced an ending portfolio value nearly 10 percent higher than a portfolio without REITs over the 35-year period from 1976 through 2010, while also reducing risk. A $10,000 initial portfolio using REITs would have generated $322,279 in retirement savings over 35 years, or $28,634 more than a portfolio without REITs. The improvement is due to REITs' high and stable dividends, long-term capital appreciation, inflation protection, and low to moderate correlation with other assets invested in a well-diversified portfolio.

"It's time for target date funds to take a closer look at REITs," said Cleo C. Chang, Managing Director and Head of Investment Research for Wilshire Funds Management, who conducted the research. "They're a triple play asset class, providing income, capital appreciation and inflation protection." One of the unique attributes of TDFs is the periodic adjustment of asset allocations over time, driven by the glide path, to reflect the decreasing risk tolerance of investors as they approach and then enter their retirement years. To evaluate the appropriate role of REITs and listed real estate securities in the glide path asset allocations of TDFs, Wilshire constructed two sets of portfolios utilizing both Mean Variance Optimization (MVO) and a methodology called Surplus Optimization (SO) for different investment horizons.

According to Wilshire, SO offers a better way to allocate assets for investors near or already in retirement, with shorter investment horizons, greater clarity of living expenses and life expectancy, and a lower tolerance for risk. Using both methodologies, Wilshire found that retirement portfolios constructed with REITs substantially outperform those without REITs while reducing the level of risk. The 35-year historical record (1976-2010) of investment performance reveals that optimal allocations to REITs using Surplus Optimization range from nine percent for investment horizons of five to 10 years to as much as 18 percent for investment horizons of up to 40 years.

"A well-designed glide path is essential to accommodate the changing levels of risk investors can tolerate throughout their careers and into retirement," said Steven A. Wechsler, president and CEO of NAREIT. "The Wilshire analysis demonstrates that an allocation to U.S. or global listed REITs and real estate securities increases the expected long-term investment performance and diversification benefits of a retirement savings and investment portfolio, including those of target date funds."

The full Wilshire research report on target date funds is available free of charge at www.REIT.com/TargetDate.