REITs No Longer Alternative Asset Class

Professor Craig Israelsen, who teaches personal and family finance at Brigham Young University, has championed the importance of diversification for investment portfolios, which provides the foundation for his 7Twelve approach to financial planning—seven broad asset classes represented by 12 actionable investments, such as mutual funds and exchange-traded funds.

In an article in the June 2012 edition of Financial Planning magazine, Israelsen explained his view of where REITs stand relative to the other cornerstones of investment portfolios like large cap U.S. equities. He recently shared his thoughts on the importance of REITs with REIT.com.

REIT.com: You dispute the idea that REITs qualify as "alternative investments." Why?

Craig Israelsen: The whole idea of "alternative" is kind of a curiosity to me. What's considered an alternative presupposes that there is an agreed upon baseline asset class. One could argue just to be provocative that real estate is that core asset class and that based on returns everything else is alternative—REITs have generated the highest returns over the last 40 years.

Presumably, the assumption is that U.S. large cap equities are the bedrock asset class. That's not a ridiculous assumption, but it is an assumption. Somehow, other types of asset classes are presently labeled alternative. Traditionally, REITs have been put in that group.

REITs have been around long enough and generated solid enough returns that I don't view REITs as an alternative class. I view them as a core asset class.

REIT.com: What has your research found about the long-term performance of REITs versus the other major investment classes?

Israelsen: Over that contiguous 42-year period from 1970 to 2011, REITs had a return of rough 11.5 percent. Large cap U.S. equities were somewhere around the 10 percent range.

The argument for REITs as an investment is that it typically has a lower correlation to the benchmark asset class. What gets lost in that correlation argument is that REITs on their own generate very impressive returns.

It's sort of like saying, "He's a great pitcher because he's left-handed." No, he's a great pitcher because he's a great pitcher. That whole low correlation argument stems from the fact that large U.S. equities have been deified. REITs can stand on their own in terms of their performance.

REITs are typically viewed as a low correlation alternative, but they're also a solid core asset class by every performance measure.