Dividend Capital
A Powerful Diversification Tool — Low Correlation to Other Asset Classes
Asset classes have the potential to perform differently from one another — when one investment is underperforming, another may be outperforming. As a result, a diversified portfolio can potentially feature lower risk and higher overall return than a portfolio consisting of just one asset class.
Correlation measures how one investment performs in relation to another. In general, asset classes with a correlation less than 0.70 or greater than -0.70 are considered to have relatively low correlation.
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Research indicates that REITs have a relatively low correlation with other asset classes, and may help reduce the volatility of a stock-and-bond portfolio.
An Improved Asset Allocation Model — the Impact of a Real Estate Allocation
For years, investors have structured their portfolio allocations to include stocks, bonds and cash. But recently investors have become aware of the positive impact real estate — the “fourth asset class” — can make on their investment portfolios.
Today, real estate is easier to own than ever, with the availability of investment vehicles such as real estate investment trusts (REITs) and real estate mutual funds. Although real estate investments entail special risks associated with operating and leasing properties, they have the potential to provide consistent income and competitive total return, and may lower risk and enhance return of an overall investment portfolio.2
Past performance is not a guarantee of future results. This material is for informational purposes only, and does not reflect the actual correlation or performance of any specific investment. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
1 Sources: Bloomberg (MSCI U.S. REIT Index, S&P 500, S&P 600 and MCSI-EAFE indices), Lehman Brothers (10-Year U.S. Govt. Treasury Bond Index), NCREIF (NCREIF Property Index) and OFHEO House Price Index. Past performance is not a guarantee of future results. This material is for informational purposes only, and does not reflect the actual correlation of specific investments. Traded REIT correlation is represented by the MSCI U.S. REIT Index, an unmanaged index of REIT securities of reasonable size and liquidity, weighted by market capitalization and considered representative of U.S. equity REIT performance. Direct property managed investment correlation is represented by NCREIF. Updated quarterly, the NCREIF Property Index (NPI), shows real estate performance returns using data submitted by investment managers and plan sponsors who own or manage real estate in a fiduciary setting. The NPI is used as an industry benchmark to compare an investor’s own returns against the industry average. The OFHEO House Price Index is a broad measure of the movement of single-family house prices. The S&P 500 Index is an unmanaged index of the 500 largest stocks (in terms of market value), weighted by market capitalization and considered representative of the broad stock market. The S&P 600 Index is an unmanaged index of 600 small-capitalization, publicly traded stocks representing a variety of industries. The 10-Year U.S. Govt. Treasury Bond Index is an index of 10-year bonds issued by the U.S. Treasury. Treasury securities are backed by the full faith and credit of the U.S. government, while REIT investments are not. Bonds, in general, will pay back their face value if held to maturity. There is no guarantee that shareholders of a REIT or real estate mutual fund will receive their full principal investment in a timely manner, nor is it guaranteed that they will receive dividend distributions from such investments. The MCSI-EAFE Index is a capitalization-weighted index that monitors the performance of stocks from Europe, Australasia and the Far East. Companies included in the S&P 500, S&P 600 and MCSI-EAFE indices are not required to pay dividends, while companies included in the MSCI U.S. REIT Index must pay 90% of their taxable income to shareholders in the form of dividends. These indices are used in comparison to the MSCI U.S. REIT Index and the NCREIF NPI in order to illustrate the total-return investment correlation of REIT stocks to non-REIT stocks of various capitalizations and bonds. Investors cannot invest directly into any index. Investments in real estate may be subject to special risks associated with operating and leasing properties, as well as risks resulting from changes in economic conditions, interest rates, property values, and supply and demand, in addition to potential environmental liabilities, zoning issues and natural disasters.
2 Source: Morningstar Inc., Financial Communications. ©2008. All rights reserved. Used with permission. Past performance is not a guarantee of future results. This material is for illustrative purposes only and is not indicative of any investment. Stocks are represented by the S&P 500; Bonds are represented by a 20-year U.S. Government Bond; T-Bills are represented by a U.S. 30-day T-Bill; REITs are represented by the NAREIT Equity REIT Index, an unmanaged index reflecting performance of U.S. real estate investment trust market. The REITs included in this index are publicly traded. Risk is represented by standard deviation, which is a statistical measurement that depicts how widely returns varied over time. The measurement is generally used to predict and understand the range of returns that are most likely for a given investment. Investors cannot invest directly into any index.
The MSCI U.S. REIT Index is an unmanaged index of REIT securities of reasonable size and liquidity, weighted by market capitalization and considered representative of U.S. equity REIT performance.
The S&P 500 Index is an unmanaged index of the 500 largest stocks (in terms of market value), weighted by market capitalization and considered representative of the broad stock market.
The S&P 600 Index is an unmanaged index of 600 small-capitalization, publicly traded stocks representing a variety of industries.
The Lehman Brothers 10-Year U.S. Treasury Bellwether Index is used as a benchmark for long-term maturity U.S. government-issued fixed-income securities. The index assumes reinvestment of all distributions and interest payments.
The MCSI-EAFE Index is a capitalization-weighted index that monitors the performance of stocks from Europe, Australasia and the Far East.
The OFHEO House Price Index is a broad measure of the movement of single-family house prices.
Companies included in the MSCI U.S. REIT Index must pay 90% of their taxable income to shareholders in the form of dividends, while companies included in the other indices above do not.
Investors cannot invest directly into any index.
REITs offered through Dividend Capital are non-traded REITs not listed on an exchange and should not be compared to REITs listed on an exchange.
Investing in real estate entails certain risks, including changes in: the economy, supply and demand, laws, tenant turnover, interest rates (including periods of high interest rates), availability of mortgage funds, operating expenses and cost of insurance.