April 19, 2017
Target-date funds: Improving diversification with direct real estate
Alice Breheny, Global Head of Research, TH Real Estate; John Cunniff, CFA, Lifecycle Portfolio Manager, TIAA Investments
- Incorporating direct real estate investments in target-date funds offers the potential to enhance diversification, reduce volatility, and improve outcomes.
- Lower correlations with major asset classes have made direct real estate a unique diversifier for stocks and bonds, with greater potential to reduce risk than real estate investment trusts (REITs)—equity securities more correlated with stocks.
- Direct real estate has provided higher risk-adjusted performance than stocks, bonds, and REITs for the past 20 years.
- TIAA research showed that a 5% allocation to direct real estate improved risk-adjusted returns and retirement accumulations in most scenarios, while also reducing risk.