Wilshire Touts Use of REITs in TDFs

According to research released by Wilshire, a target-date fund (TDF) portfolio, including U.S. Real Estate Investment Trusts (REITs), would produce an ending portfolio value nearly 10% higher than a portfolio without REITs over a 35-year period (1976 to 2010), while also reducing risk.

A $10,000 initial portfolio using REITs would have generated $322,279 in retirement savings over 35 years, or $28,634 more than a portfolio without REITs. The improvement is due to REITs’ high and stable dividends, long-term capital appreciation, inflation protection and low to moderate correlation with other assets invested in a well-diversified portfolio.

Depending on the number of years to retirement, optimally allocated TDFs should include REIT allocations of nearly 9% to nearly 18%, according to Wilshire’s research. While a number of leading TDF providers have included REIT allocations in their funds, many of the largest TDF providers are giving up performance because they are under-allocated to REITs.

“It’s time for target-date funds to take a closer look at REITs,” said Cleo C. Chang, managing director and head of investment research for Wilshire Funds Management, who conducted the research. “They’re a triple play asset class, providing income, capital appreciation and inflation protection.”

 About the Research  

According to Wilshire, one of the unique attributes of TDFs is the periodic adjustment of asset allocations over time, driven by the glide path, to reflect the decreasing risk tolerance of investors as they approach and then enter their retirement years. To evaluate the appropriate role of REITs and listed real estate securities in the glide path asset allocations of TDFs, Wilshire constructed two sets of portfolios utilizing both Mean Variance Optimization (MVO) and a methodology called Surplus Optimization (SO) for different investment horizons.

According to Wilshire, SO offers a better way to allocate assets for investors near or already in retirement, with shorter investment horizons, greater clarity of living expenses and life expectancy, and a lower tolerance for risk.

Using both methodologies, Wilshire found that retirement portfolios constructed with REITs substantially outperform those without REITs while reducing the level of risk. The 35-year historical record (1976 to 2010) of investment performance reveals that optimal allocations to REITs using SO range from 9% for investment horizons of five to 10 years to as much as 18% for investment horizons of up to 40 years.

Over the 35-year investment period, the TDF portfolio including U.S. REITs using SO would have resulted in a portfolio value at the end of 2010 that was 9.75% higher than that of the MVO portfolio without U.S. REITs and 5.95% higher than that of the MVO portfolio including U.S. REITs.

The full Wilshire research report on target-date funds is available free of charge at www.REIT.com/TargetDate.