We are reviewing the advice given in relation to the breaks of REIT funds within your portfolio:
You should consider taking advantage of the breaks of REIT funds within your portfolio. Property is an excellent diversifier to equities and you should consider swapping some of your existing property funds into this arrangement.
Our advice on the above:
Consider it but also consider stopping there.
Diversification is all about gaining a negative correlation. Whilst property has a good negative correlation with equities global REITs are highly correlated and provide no real diversification – a bit like investing into a Wellington boot company and an umbrella company.
Differences in performance behavior between physical property and property security portfolios results in a significantly different potential for diversification purposes. The table below shows the correlation between various indices representing UK equities, overseas equities, gilts, direct property and global REITS over the past seven years. The correlation coefficient (‘R’) has a theoretical range of 100% (perfect positive correlation) to -100% (perfect negative correlation).
An effective diversifier would have a low positive or negative correlation with other asset types.
Indeed, the cross-correlation table shows that direct UK Property has a low positive correlation of between 10% and 25% with each of the other four asset classes.
Correlation coefficient between indices over 84m to 31/12/2006*
|Asset||Index||UK Equities||Overseas Equities||UK Fixed Interest||UK Property||Global REITs|
|UK Equities||FTSE All Share||100%||90%||-28%||22%||62%|
|Overseas Equities||FTSE World ex UK||90%||100%||-28%||19%||68%|
|UK Fixed Interest||FTSE A British Govt All Stocks||-28%||-28%||100%||10%||-10%|
|UK Property||IPD UK All Property Monthly||22%||19%||10%||100%||23%|
|Global REITs||FTSE EPRA/NAREIT Global||62%||68%||-10%||23%||100%|
*Data Source: Lipper
Worldwide’s score: 3 out of 10