The cyclical behaviour of sector and regional diversification benefits: 1987-2002

This paper investigates the time series behaviour of the relative benefits of sector and regional diversification strategies, using the notion of cross-sectional dispersion introduced by Solnik and Roulet (2000). Using monthly data over the period 1987:1 to 2002:12, four sector and four regional classifications are examined in the UK. The results indicate that sector and regional dispersion indices are highly time varying and so dwarf any lower frequency cyclical components that may be present. Nonetheless, periods of high dispersion are closely followed by periods of low dispersion, suggestive of cyclical behaviour of sector and regional diversification benefits. Then, using the HP-filter we isolated the cyclical component of the various dispersion indices and found that the sector dispersion indices are generally above the regional dispersion indices. This implies that a sector diversification strategy is likely to offer greater risk reduction benefits than a regional diversification approach. Nonetheless, we find that in some periods, certain regional diversification strategies are of equal or greater benefit than certain sector approaches. The results also appear to be quite sensitive to the classifications of sectors and regions. Hence, the appropriate definition of sectors and regions can have important implications for sector and regional diversification strategies.

Testing the statistical significance of sector & regional diversification

The question as to whether it is better to diversify a real estate portfolio within a property type across the regions or within a region across the property types is one of continuing interest for academics and practitioners alike. The current study, however, is somewhat different from the usual sector/regional analysis taking account of the fact that holdings in the UK real estate market are heavily concentrated in a single region, London. As a result this study is designed to investigate whether a real estate fund manager can obtain a statistically significant improvement in risk/return performance from extending out of a London based portfolio into firstly the rest of the South East of England and then into the remainder of the UK, or whether the manger would be better off staying within London and diversifying across the various property types. The results indicating that staying within London and diversifying across the various property types may offer performance comparable with regional diversification, although this conclusion largely depends on the time period and the fund manager’s ability to diversify efficiently.

Liability of country foreignness and liability of regional foreignness: their effects on geographic diversification and firm performance

The costs of inter- and intra-regional diversification have been widely discussed in the existing international business literature, but the findings are mixed. Explanations for the mixed findings have important managerial implications, because business managers have to estimate accurately the costs of doing business within and across regions before they make their internationalization decisions. To explain the existing mixed findings, this study differentiates between liabilities of foreignness at the country and regional levels, and explores the joint effects of liability of country foreignness (LCF) and liability of regional foreignness (LRF) on the performance of internationalizing firms. Using data from 167 Canadian firms, we find that LCF may not necessarily be negatively correlated with intra-regional diversification, but LRF is positively correlated with inter-regional diversification. LCF moderates the relationship between LRF and inter-regional diversification, and also mediates the relationship between intra-regional diversification and firm performance. LRF mediates the relationship between inter-regional diversification and firm performance. Missing one or more of these variables may result in different cost estimates. Identification of the relationships between these variables helps to improve the accuracy of estimating the costs of doing business aboard.

The relative importance sector and regional factors in Italy

The benefits of sector and regional diversification have been well documented in the literature but have not previously been investigated in Italy. In addition, previous studies have used geographically defined regions, rather than economically functional areas, when performing the analysis even though most would argue that it is the economic structure of the area that will lead to differences in demand and hence property performance. This study therefore uses economically defined regions of Italy to test the relative benefits of regional diversification versus sector diversification within the Italian real estate portfolio. To examine this issue we use constrained cross-section regressions the on the sector and regional affiliation of 14 cities in Italy to extract the “pure” return effects of the different factors using annual data over the period 1989 to 2003. In contrast, to previous studies we find that regional factors effects in Italy have a much greater influence on property returns than sector-specific effects, which is probably a direct result of using the extremely diverse economic regions of Italy rather than arbitrary geographically locations. Be that as it may, the results strongly suggest that that diversification across the regions of Italy used here is likely to offer larger risk reduction benefits than a sector diversification strategy within a region. In other words, fund managers in Italy must monitor the regional composition of their portfolios more closely than its sector allocation. Additionally, the results supports that contemporary position that ‘regional areas’ based on economic function, provide greater diversification benefits rather than areas defined by geographical location.

The relative importance of sectors v's regions in determining property returns

A number of studies have investigated the benefits of sector versus regional diversification within a real estate portfolio without explicitly quantify the relative benefits of one against the other. This paper corrects this omission by adopting the approach of Heston and Rouwenhorst (1994) and Beckers, Connor and Curds (1996) on a sample of 187 property data points using annual data over the period 1981-1995. The general conclusion of which is the sector diversification explains on average 22% of the variability of property returns compared with 8% for administratively defined regions. A result in line with previous work. Implying that sector diversification should be the first level of analysis in constructing and managing the real estate portfolio. However, unlike previous work functionally defined regions provide less of an explanation of regional diversification than administrative regions. Which may be down to the weak definition of economic regions employed in this study.

The inter-temporal stability of real estate returns: an empirical investigation

This paper examines one of the central issues in the formulation of a sector/regional real estate portfolio strategy, i.e. whether the means, standard deviations and correlations between the returns are sufficiently stable over time to justify using ex-post measures as proxies of the ex-ante portfolio inputs required for MPT. To investigate these issues this study conducts a number of tests of the inter-temporal stability of the total returns of the 19 sector/regions in the UK of the IPDMI. The results of the analysis reveal that the theoretical gains in sector and or regional diversification, found in previous work, could not have been readily achieved in practice without almost perfect foresight on the part of an investor as means, standard deviations and correlations, varied markedly from period to period.

Changes in the relative importance of sector and regional factors: 1987-2002

A stylised fact in the real estate portfolio diversification literature is that sector (property-type) effects are relatively more important than regional (geographical) factors in determining property returns. Thus, for those portfolio managers who follow a top-down approach to portfolio management, they should first choose in which sectors to invest and then select the best properties in each market. However, the question arises as to whether the dominance of the sector effects relative to regional effects is constant. If not property fund managers will need to take account of regional effects in developing their portfolio strategy. Using monthly data over the period 1987:1 to 2002:12 for a sample of over 1000 properties the results show that the sector-specific factors dominate the regional-specific factors for the vast majority of the time. Nonetheless, there are periods when the regional factors are of equal or greater importance than the sector effects. In particular, the sector effects tend to dominate during volatile periods of the real estate cycle; however, during calmer periods the sector and regional effects are of equal importance. These findings suggest that the sector effects are still the most important aspect in the development of an active portfolio strategy.

Technological change and the challenges for regional development: building social capital in less-favoured regions

The relevance of regional policy for less favoured regions (LFRs) reveals itself when policy-makers must reconcile competitiveness with social cohesion through the adaptation of competition or innovation policies. The vast literature in this area generally builds on an overarching concept of ‘social capital’ as the necessary relational infrastructure for collective action diversification and policy integration, in a context much influenced by a dynamic of industrial change and a necessary balance between the creation and diffusion of ‘knowledge’ through learning. This relational infrastructure or ‘social capital’ is centred on people’s willingness to cooperate and ‘envision’ futures as a result of “social organization, such as networks, norms and trust that facilitate action and cooperation for mutual benefit” (Putnam, 1993: 35). Advocates of this interpretation of ‘social capital’ have adopted the ‘new growth’ thinking behind ‘systems of innovation’ and ‘competence building’, arguing that networks have the potential to make both public administration and markets more effective as well as ‘learning’ trajectories more inclusive of the development of society as a whole. This essay aims to better understand the role of ‘social capital’ in the production and reproduction of uneven regional development patterns, and to critically assess the limits of a ‘systems concept’ and an institution-centred approach to comparative studies of regional innovation. These aims are discussed in light of the following two assertions: i) learning behaviour, from an economic point of view, has its determinants, and ii) the positive economic outcomes of ‘social capital’ cannot be taken as a given. It is suggested that an agent-centred approach to comparative research best addresses the ‘learning’ determinants and the consequences of social networks on regional development patterns. A brief discussion of the current debate on innovation surveys has been provided to illustrate this point.

Sector, region or function? A MAD reassessment of real estate diversification in Great Britain

This paper re-examines whether it is more advantageous in terms of risk reduction to diversify by sector or region by comparing the performance of the ‘conventional’ regional classification of the UK with one based on modern socio-economic criteria using a much larger real estate data set than any previous study and the MAD portfolio approach. The general conclusion of this analysis is that property market sectors still dominate regions, however defined and so should be the first level of analysis when developing a portfolio diversification strategy. This is in line with previous research. When the performance of Functional groups is compared with the ‘conventional’ administrative regions the results here show that, when functionally based, groupings can in some cases provide greater risk reduction. In addition the underlying characteristics of these functional groups may be much more insightful and acceptable to real estate portfolio managers in considering the assets that a portfolio might contain.

Sector and regional factors in real estate returns

This paper presents a simple method to measure the effect of sector and regional factors in real estate returns, and thus provides a quantitative framework for analysing the relative impact of these two diversification categories to real estate portfolio selection. Using data on Retail, Office and Industrial properties spread across 326 real estate locations in the UK, over the period 1981 to 1995, the results show that the performance of real estate is largely sector-driven. A result in line with previous work. Which implies that the sector composition of the real estate fund should be the first level of analysis in constructing and managing the real estate portfolio. As a consequence real estate fund managers need to pay more attention to the sector allocation of their portfolios than the regional spread.

Changes in the relative importance of sector and regional Factors: 1987-2002

A stylised fact in the real estate portfolio diversification literature is that sector (property-type) effects are relatively more important than regional (geographical) factors in determining property returns. Thus, for those portfolio managers who follow a top-down approach to portfolio management, they should first choose in which sectors to invest and then select the best properties in each market. However, the question arises as to whether the dominance of the sector effects relative to regional effects is constant. If not property fund managers will need to take account of regional effects in developing their portfolio strategy. We find the results show that the sector-specific factors dominate the regional-specific factors for the vast majority of the time. Nonetheless, there are periods when the regional factors are of equal or greater importance than the sector effects. In particular, the sector effects tend to dominate during volatile periods of the real estate cycle; however, during calmer periods the sector and regional effects are of equal importance. These findings suggest that the sector effects are still the most important aspect in the development of an active portfolio strategy.