When does direct real estate improve portfolio performance?

For over twenty years researchers have been recommending that investors diversify their portfolios by adding direct real estate. Based on the tenets of modern portfolio theory (MPT) investors are told that the primary reason they should include direct real estate is that they will enjoy decreased volatility (risk) through increased diversification. However, the MPT methodology hides where this reduction in risk originates. To over come this deficiency we use a four-quadrant approach to break down the co-movement between direct real estate and equities and bonds into negative and positive periods. Then using data for the last 25-years we show that for about 70% of the time a holding in direct real estate would have hurt portfolio returns, i.e. when the other assets showed positive performance. In other words, for only about 30% of the time would a holding in direct real estate lead to improvements in portfolio returns. However, this increase in performance occurs when the alternative asset showed negative returns. In addition, adding direct real estate always leads to reductions in portfolio risk, especially on the downside. In other words, although adding direct real estate helps the investor to avoid large losses it also reduces the potential for large gains. Thus, if the goal of the investor is offsetting losses, then the results show that direct real estate would have been of some benefit. So in answer to the question when does direct real estate improve portfolio performance the answer is on the downside, i.e. when it is most needed.

An examination of the complementary volume–volatility information theories

The volume–volatility relationship during the dissemination stages of information flow is examined by analyzing various theories relating volume and volatility as complementary rather than competing models. The mixture of distributions hypothesis, sequential arrival of information hypothesis, the dispersion of beliefs hypothesis, and the noise trader hypothesis all add to the understanding of how volume and volatility interact for different types of futures traders. An integrated picture of the volume–volatility relationship is provided by investigating the dynamic linear and nonlinear associations between volatility and the volume of informed (institutional) and uninformed (the general public) traders. In particular, the trading behavior explanation for the persistence of futures volatility, the effect of the timing of private information arrival, and the response of institutional traders to excess noise trading risk is examined

The effect of asymmetries on optimal hedge ratios

There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.

Direct iminization of PEEK

Semi-crystalline poly(ether ketone)s are important high-temperature engineering thermoplastics, but are difficult to characterize at the molecular level because of their insolubility in conventional organic solvents. Here we report that polymers of this type, including PEEK, react cleanly at high temperatures with low-volatility aralkyl amines to afford stable, noncrystalline poly(ether-imine)s, which are readily soluble in solvents such as chloroform, THF and DMF and so characterizable by conventional size-exclusion chromatography.

The investment development path in a globalised world: implications for Eastern Europe

This article summarises recent revisions to the investment development path (IDP) as postulated by Narula and Dunning (2010). The IDP provides a framework to understand the dynamic interaction between foreign direct investment (FDI) and economic development. The revisions take into account some recent changes in the global economic environment. This paper argues that studies based on the IDP should adopt a broader perspective, encompassing the idiosyncratic economic structure of countries as well as the heterogeneous nature of FDI. It is critical to understand the complex forces and interactions that determine the turning points in a country’s IDP, and to more explicitly acknowledge the role of historical, social and political circumstances in hindering or promoting FDI. We discuss some of the implications for Eastern European countries and provide some guidelines for future research.

The impact of corporate social performance on financial risk and utility: a longitudinal analysis

This study focuses on the wealth-protective effects of socially responsible firm behavior by examining the association between corporate social performance (CSP) and financial risk for an extensive panel data sample of S&P 500 companies between the years 1992 and 2009. In addition, the link between CSP and investor utility is investigated. The main findings are that corporate social responsibility is negatively but weakly related to systematic firm risk and that corporate social irresponsibility is positively and strongly related to financial risk. The fact that both conventional and downside risk measures lead to the same conclusions adds convergent validity to the analysis. However, the risk-return trade-off appears to be such that no clear utility gain or loss can be realized by investing in firms characterized by different levels of social and environmental performance. Overall volatility conditions of the financial markets are shown to play a moderating role in the nature and strength of the CSP-risk relationship.

Ownership, occupation and risk: a view of the City of London office market

Office returns in the City of London are more volatile than in other UK markets. This volatility may reflect fluctuations in capital flows associated with changing patterns of ownership and the growing linkage between real estate and financial markets in the City. Using current and historical data, patterns of ownership in the City are investigated. They reveal that overseas ownership has grown markedly since 1985, that owners are predominantly FIRE-sector firms and that there are strong links between ownership and occupation. This raises concerns about future volatility and systemic risk in a market strongly influenced by the cyclical behaviour and shocks of the international financial system.

Separating skill from luck in REIT mutual funds

This study uses a bootstrap methodology to explicitly distinguish between skill and luck for 80 Real Estate Investment Trust Mutual Funds in the period January 1995 to May 2008. The methodology successfully captures non-normality in the idiosyncratic risk of the funds. Using unconditional, beta conditional and alpha-beta conditional estimation models, the results indicate that all but one fund demonstrates poor skill. Tests of robustness show that this finding is largely invariant to REIT market conditions and maturity.

Correlation shifts and real estate portfolio management

The success of any diversification strategy depends upon the quality of the estimated correlation between assets. It is well known, however, that there is a tendency for the average correlation among assets to increase when the market falls and vice-versa. Thus, assuming that the correlation between assets is a constant over time seems unrealistic. Nonetheless, these changes in the correlation structure as a consequence of changes in the market’s return suggests that correlation shifts can be modelled as a function of the market return. This is the idea behind the model of Spurgin et al (2000), which models the beta or systematic risk, of the asset as a function of the returns in the market. This is an approach that offers particular attractions to fund managers as it suggest ways by which they can adjust their portfolios to benefit from changes in overall market conditions. In this paper the Spurgin et al (2000) model is applied to 31 real estate market segments in the UK using monthly data over the period 1987:1 to 2000:12. The results show that a number of market segments display significant negative correlation shifts, while others show significantly positive correlation shifts. Using this information fund managers can make strategic and tactical portfolio allocation decisions based on expectations of market volatility alone and so help them achieve greater portfolio performance overall and especially during different phases of the real estate cycle.

The regional and global competitiveness of multinational firms

International competitiveness ultimately depends upon the linkages between a firm’s unique, idiosyncratic capabilities (firm-specific advantages, FSAs) and its home country assets (country-specific advantages, CSAs). In this paper, we present a modified FSA/CSA matrix building upon the FSA/CSA matrix (Rugman 1981). We relate this to the diamond framework for national competitiveness (Porter 1990), and the double diamond model (Rugman and D’Cruz 1993). We provide empirical evidence to demonstrate the merits and usefulness of the modified FSA/CSA matrix using the Fortune Global 500 firms. We examine the FSAs based on the geographic scope of sales and CSAs that can lead to national, home region, and global competitiveness. Our empirical analysis suggests that the world’s largest 500 firms have increased their firm-level international competitiveness. However, much of this is still being achieved within their home region. In other words, international competitiveness is a regional not a global phenomenon. Our findings have significant implications for research and practice. Future research in international marketing should take into account the multi-faceted nature of FSAs and CSAs across different levels. For MNE managers, our study provides useful insights for strategic marketing planning and implementation.

Pricing short leases and break clauses using simulation methodology

This paper examines the changes in the length of commercial property leases over the last decade and presents an analysis of the consequent investment and occupational pricing implications for commercial property investmentsIt is argued that the pricing implications of a short lease to an investor are contingent upon the expected costs of the letting termination to the investor, the probability that the letting will be terminated and the volatility of rental values.The paper examines the key factors influencing these variables and presents a framework for incorporating their effects into pricing models.Approaches to their valuation derived from option pricing are critically assessed. It is argued that such models also tend to neglect the price effects of specific risk factors such as tenant circumstances and the terms of break clause. Specific risk factors have a significant bearing on the probability of letting termination and on the level of the resultant financial losses. The merits of a simulation methododology are examined for rental and capital valuations of short leases and properties with break clauses.It is concluded that in addition to the rigour of its internal logic, the success of any methodology is predicated upon the accuracy of the inputs.The lack of reliable data on patterns in, and incidence of, lease termination and the lack of reliable time series of historic property performance limit the efficacy of financial models.

Fixing the currency: analysing the implications for property investment performance

This paper analyses the historic effects of exchange rate movements on returns, risk and diversification of office markets within the Euro zone in order to gain insights into the investment consequences of conversion to a fixed rate currency regime. The data used in the study represents annual office rental growth rates for 22 European cities from nine European Union countries between 1985 and 1996. Relative performance is reported in terms of domestic currency and in terms of deutsche marks. The evidence presented suggests that Euro zone property investors in ‘southern’ countries are now protected from short term jump risk associated with flexible peg currency arrangements and medium/long-term currency volatility. Historically exchange rate movements have produced decreases in returns and increases in volatility. For northern ‘bloc’ cities, the effects of fixing the exchange rate are minimal. For these cities, national exchange rate fluctuations against the deutsche mark have been minor and the resultant implications for property risk and return to non-domestic SCA investors have been negligible. Moreover, although previous research would suggest that the effect of currency volatility is to decrease market correlation, this cannot be observed within the Euro zone.

Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

International investment, ownership and risk in the City of London office market: an analysis of trends 1972-1997

Office returns in the City of London are more volatile than in other UK markets. This volatility may reflect fluctuations in capital flows associated with changing patterns of ownership and the growing linkage between real estate and financial markets in the City. Using current and historical data, patterns of ownership in the City are investigated. They reveal that overseas ownership has grown markedly since 1985, that owners are predominantly FIRE sector firms and that there are strong links between ownership and occupation. This raises concerns about future volatility and systemic risk.

Is there a place for property in the multi-asset portfolio?

The case for property has typically rested on the application of modern portfolio theory (MPT), in that property has been shown to offer increased diversification benefits within a multi asset portfolio without hurting portfolio returns especially for lower risk portfolios. However this view is based upon the use of historic, usually appraisal based, data for property. Recent research suggests strongly that such data significantly underestimates the risk characteristics of property, because appraisals explicitly or implicitly smooth out much of the real volatility in property returns. This paper examines the portfolio diversification effects of including property in a multi-asset portfolio, using UK appraisal based (smoothed) data and several derived de-smoothed series. Having considered the effects of de-smoothing, we then consider the inclusion of a further low risk asset (cash) in order to investigate further whether property's place in a low risk portfolio is maintained. The conclusions of this study are that the previous supposed benefits of including property have been overstated. Although property may still have a place in a 'balanced' institutional portfolio, the case for property needs to be reassessed and not be based simplistically on the application of MPT.