07/21/2011 | By Carisa Chappell
REITs offer a number of benefits to investors looking to diversify their portfolio, according to Carlton Chin, a portfolio manager with ADAMAH Capital who specializes in alternative investments.
Chin suggests that investors have a well-balanced portfolio with allocations to a number of asset classes, including real estate. In an interview with REIT.com, he said alternative investments such as REITs offer increased diversification benefits thanks to lower correlations to the broader market.
"I love REITs for several reasons," Chin said. "There is the exposure to real estate and a return stream that offers diversification benefits for traditional stock and bond portfolios."
Chin said that REITs offer liquidity as well. He noted that REITs are also especially beneficial to smaller investors or those who can't manage a real estate portfolio.
In his suggested allocation model, Chin advises investors to dedicate 10 percent of their allocations to REITs and 15 percent to international REITs. Chin noted that international REITs look promising in terms of long-term growth and diversification potential.
While the recent financial crisis hurt many sectors, Chin said, in the long run, the diversification benefits of REITs will win over an increasing number of investors. "The economy will eventually rebound, and as real estate and REITs rise, so will their popularity," Chin said.
Chin added that when selecting asset allocations for a well-diversified portfolio, he likes to see a non-correlated return stream for alternative assets relative to equities. Along with low correlations, he likes to see underlying economic drivers or positive expected returns and solid long-term performance.
"Liquidity, tax-efficiency and relatively low fees are also important," Chin said.
Chin pointed out that diversification can sometimes be misleading for investors, because in a financial crisis, many asset classes can suddenly begin to move together. In that instance, he said diversification will still help, but investors should not be lulled into a false sense of security.
"I do what I do because I believe that alternatives offer the best strategies for diversifying the traditional portfolio and improving risk-adjusted returns in the long run," he said.