REITs an Important Part of
an Inflation Hedging Strategy
From “Inflation-Hedging Properties of Real Assets and Implications for Asset-Liability Management
Decisions,” by Noël Amenc, Lionel Martellini and Volker Ziemann, published in Journal of Portfolio
Management 35: 4, 2009.
Atrio of French economists investigated the role of real assets in an inflation hedging portfolio strategy, and found significant
portfolio benefits of including U.S. REITs. Noël
Amenc and Lionel Martellini of EDHEC Business School in Nice, along with Volker Ziemann
of the French Ministry of Economy, Industry and
Employment, found that commodities and U.S.
REITs both provide important advantages relative
to Treasury inflation-protected securities ( TIPS) or
inflation swaps.
“Our results suggest that novel liability-hedg-
ing investment solutions, including commodities
and real estate in addition to inflation-linked
securities, can be designed to decrease the cost
of inflation insurance for long-horizon investors.
Such solutions are shown to achieve satisfactory
levels of inflation hedging over the long term
at a lower cost compared to a solution solely
based on TIPS or inflation swaps. Intuitively, the
increased expected return potential generated
through the introduction of commodities and
real estate in addition to TIPS in the liability-
hedging portfolio allows for a reduced global
allocation to the performance-seeking portfolio
while meeting the global performance expecta-
tions and, in turn, allows for better risk manage-
ment properties.”
An economist from the St. Louis Fed, with two Ital- ian colleagues, affirmed
the importance of real estate in a
mixed-asset portfolio even when
investors must predict optimal
portfolio weights based only on
past returns. Massimo Guidolin of
the St. Louis Fed, with Carolina
Fugazza and Giovanna Nicodano
of the University of Turin, found
that optimal portfolio allocations
to U.S. REITs varied from 33
percent to 59 percent.
“The main exercise of this
article consists of a fully re-
cursive scheme of model esti-
mation and optimal portfolio
optimization. We find that
diversification into U.S. REITs
increased both the Sharpe ratio
and the certainty equivalent
of wealth for all investment
horizons and for both classical
and Bayesian investors. When
REITs are reintroduced in the
asset menu, public real estate
ends up crowding out the other
risky assets due to its very high
Sharpe ratio. Irrespective of
the investment horizon and of
the estimation method, we find
positive ex post welfare effects
deriving from the inclusion
of equity REITs in the asset
menu.”
Study Supports Optimal REIT Allocations
in the 33% to 59% Range
From “Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value” by
Carolina Fugazza, Massimo Guidolin, and Giovanna Nicodano, published in Real Estate Economics, 37: 3, 2009.
