Research Finds Target Date Funds Need Higher REIT Allocations

John Worth, NAREIT’s senior vice president for research and investor outreach, joined Kurt Walten, NAREIT’s senior vice president for investment affairs and investor education, for a REIT.com video to discuss new NAREIT-sponsored research from investment advisory firm Wilshire Associates on the role of REITs and listed real estate equities in target date fund (TDF) asset allocations.

“Over the past seven years we have sponsored multiple researchers to consider different variations of this same question.  The consistency of the results is striking.  Research finds that the optimal allocation in a portfolio includes a very meaningful share of REITs, typically up to 20 percent,” Worth said.

The latest Wilshire study suggests that at the 40 years-to-retirement horizon, REITs should make up close to 17 percent of an investment portfolio. At the time of retirement, REITs should contribute up to 8 percent of the portfolio, according to the study.

Worth noted that TDFs are the fastest growing product in the defined contribution (DC) universe. Many experts predict that within a decade, TDFs could hold the majority of DC plan assets, “so it’s very important to consider the optimal allocation within this type of investment vehicle,” Worth said.

Today, most TDFs have some REIT allocations, but the Wilshire research suggests those allocations are “far below what would be optimal,” Worth noted. He added that the research calls for a meaningful allocation to REITs across the working age spectrum.

Meanwhile, Worth stressed that investable real estate makes up more than 20 percent of the U.S. investment market basket. Because REITs are a unique asset class, they have different drivers than stocks and bonds, making the long-term correlation between the asset classes quite low. This makes REITs good diversifiers within portfolios, Worth observed.

“Add to that the fact that REIT total returns have outperformed the stock and bond indexes over the long term, and you’ll find that REITs make up an important part of an optimal portfolio,” Worth said.