CEM Study Reveals Listed Equity REITs Increased Defined Benefit Plans’ Returns
10/14/2014 | by Sarah Borchersen-Keto

Alex Beath, an analyst on the Product Solutions Team at Toronto-based CEM Benchmarking, visited NAREIT’s Washington, D.C. headquarters for a video interview with REIT.com to discuss CEM’s new study on defined benefit (DB) plan asset allocation and fund performance.

The study, sponsored by NAREIT, is based on data provided by more than 300 U.S. DB plans with a combined $2.8 trillion of assets. It analyzed the period from 1998 through 2011. Beath noted that the asset allocation of pension funds in the U.S. changed dramatically during this time period, resulting in large changes in their investment performance.

Looking at specific asset classes, he pointed out that private equity reported the highest gross total returns on average over the course of the study period, returning a little more than 13 percent. Following immediately behind were stock exchange-listed equity REITs, Beath said, which reported gross returns of close to 12 percent on average.

However, the costs associated with investing in private equity were reported to be about 250 basis points on average, reducing the actual net return closer to 11 percent, Beath said. Listed equity REITs, however, reported average investment costs of about 50 basis points, leading to average net returns of approximately 11.5 percent. “On a net return basis, [the REIT industry] becomes the best-performing asset class,” Beath said.

Beath also compared the performance of listed equity REITs with private real estate investments included in the study.

“Both asset classes are investing in the same core asset,” Beath said. However, he went on to point out that the average reported cost of investing in private real estate was at least twice the average reported cost of investing in listed REITs.  “Over 14 years, this difference becomes magnified, and you find that equity REITs on a net return basis outperformed their private companion.”

Meanwhile, Beath stressed that asset allocation was the primary driver of investment returns in pension funds. The CEM study estimated the impact on portfolio performance that would have resulted from a one percentage point change in the allocation to each of the 12 asset classes included in the study. For example, if a typical pension plan in 1998 with about $15 billion in assets had allocated one percentage point more to listed equity REITs, it would have boosted total returns by nearly $200 million over the 14-year period of the study.

Beath emphasized the significance of the new CEM data: “When you realize that U.S. defined benefit pension plans hold some $7 trillion of assets and that these assets are going to be providing retirement income to millions of Americans, you realize that the asset allocation decisions made by the plans are of upmost importance.”

Past performance does not guarantee future results. Data should not be construed as investment advice and is provided for informational purposes only.