Using commercial real estate debt in a portfolio can help lower risk and enhance returns due to the non-correlated qualities of the asset class, recent research has revealed.
The results of a research paper from the University of Technology Sydney and investment manager MaxCap Group, which focused on qualitative analysis of the risk and return dynamics of commercial real estate debt (CRED), showed that they were negatively correlated with other major asset classes.
A blended CRED portfolio was shown to have a -0.11 correlation to equities, a correlation of 0.13 with bonds and a -0.42 correlation with cash.
Additionally, historical analysis undertaken as part of the research revealed that the average annual return of a balanced portfolio was boosted by 0.7 per cent once an allocation was made to CRED, while volatility improved by almost 1 per cent.
Further, the analysis showed that returns on CRED tended to improve during a crisis situation or period of sustained economic uncertainty, thereby “acting as a stabilising force in an investment portfolio”, the paper said.
“CRED has demonstrated resilience throughout market cycles including in the current COVID-19 environment and therefore presents a strategic allocation for investors focused on capital preservation through stable, defensive and asset-backed income,” the paper said.
“The results clearly identify that the inclusion of CRED in an investor’s portfolio delivers enhanced returns, provides downside protection, and reduces volatility and therefore increases risk-adjusted returns, the alpha or active return premium,” MaxCap co-founder and managing director Wayne Lasky said.
“There are very few asset classes that can lay claim to such impressive performance.”
Twelve investment consulting firms, which control assets of approximately US$10 trillion, have announced the launch of the Net Zero Investme...
As NSW and Victoria present their own road maps out of lockdown, many Australian wealth management leaders are striving for a return to “n...