The classic 60:40 mix of stocks and bonds has shifted to a 40:40:20 mix of stocks, bonds and alternatives, according to the 2014 MSCI Asset Owner survey.
Real estate accounts, on average, for 35% of alternatives, or close to $700 billion of their total $10.3 trillion in assets under management, the survey found. The 138 asset owners held an average of 6.7% of total assets in real estate. But if nine asset owners with no real estate are excluded, this figure jumps to 7.9%. Still, that average is understated as leverage expands the exposure, while many asset owners do not count REITs or CMBS within real estate.
However, there was significant variation across regions, as can be seen below:
Alternative Allocations Across Regions
Despite the significance of real estate in the portfolio, the integration of the asset class from a risk perspective has started only since the 2008-9 global financial crisis.
The survey indicates that asset owners have since then applied greater scrutiny over their real estate exposure, and potential misalignments through the real estate investment process. These challenges have stemmed from a number of related factors, including the complexity of the real estate asset class, data limitations and a relatively weak understanding of the different roles that real estate can play in the overall portfolio. The result has been a gulf between central risk functions (CIO, risk and allocation departments) and the real estate departments. Some of the main challenges are summarized in the exhibit below.
Challenges in the Real Estate Investment Process
In response, some Asset Owners have adopted “best practices” that serve to tighten real estate risk management on three main dimensions.
- Allocation: Embraced greater clarity over the role of real estate in the portfolio, the use of robust models and data, the integration of real estate exposure into multi-asset-class and investment options for the asset class.
- Strategy: Developed a clear investment strategy, the use of appropriate benchmarks and awareness of risks of their exposure.
- Implementation: Adopted measures to address the potential disconnect between strategic allocations and the implementation of the investment strategy.