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MANAGING PERFORMANCE & RISK THROUGH BLENDED GLOBAL INVESTMENT STRATEGIES

Mark Clacy-Jones, Head of Applied Research, Real Estate, MSCI

ERES Annual Conference, Istanbul, June 2015

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• Driving forces for Blended Strategies

• Routes for Accessing Real Estate

• Dataset Construction

• Use Cases by Investment Mandate / Investor Type

• Further Work & Conclusion

AGENDA

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Globalisation of Real Estate

• Capital Flows

• Diversification

Fund Size

• Large getting larger whilst smaller funds need liquidity & diversification

Regulation

• Solvency II, etc.

Defined Benefit & Defined Contribution Pensions

• Need for increased liquidity

DRIVING FORCES FOR BLENDED STRATEGIES

DRIVING FORCES IN GLOBAL REAL ESTATE – ASSET ALLOCATION

Asset allocations across regions. 40:40:20 has replaced 60:40

Global Regional

Note: Based on 138 asset owners in Survey Universe. Calculated on % of assets in each category, not number of asset owners. Source: MSCI

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DRIVING FORCES IN GLOBAL REAL ESTATE – ALTERNATIVES

Real Estate is the favoured “alternative” asset in all markets except USA

Global Regional

Note: Based on 138 asset owners in Survey Universe. Calculated on % of assets in each category, not number of asset owners. Source: MSCI

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DRIVING FORCES IN GLOBAL REAL ESTATE – HOME BIAS

53%

30%

44%

36%39%

62% 61%

98%

70%64%

87%93%

81%

61%

95%90% 92%

79%

47%

70%

56%

64%61%

38% 40%

2%

30%36%

13%7%

19%

39%

5%10% 8%

21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Aust

ralia

Cana

da

Japa

n

Switz

erla

nd UK US

Aust

ralia

Cana

da

Japa

n

Switz

erla

nd UK US

Aust

ralia

Cana

da

Japa

n

Switz

erla

nd UK US

Domestic

Foreign

2013 estimates of Pension Fund Domestic and Foreign exposure for Equities, Bonds and Real Estate, across major countries

Equities

(Domestic Avg: 43%)Bonds

(Domestic Avg: 79%)

Real Estate

(Domestic Avg: 83%)

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Note: Based on 138 asset owners in Survey Universe. Calculated on % of assets in each category, not number of asset owners. Source: MSCI

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DEFINED BENEFIT TO DEFINED CONTRIBUTION PENSIONS

Asset allocation 2013 DB/DC Split 2013

Source: Towers Watson and secondary sources

1 DC assets in Switzerland are cash balance plans and are excluded from this analysis.

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Direct Real Estate

Listed Property Company Shares (REITs, etc.)

Unlisted Real Estate Funds

Real Estate Debt

Derivatives

ROUTES FOR ACCESSING REAL ESTATE

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SPECTRUM OF INVESTMENT BEHAVIOUR

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ADDITIONAL VOLATILITY FOR DIRECT PROPERTY

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RISK & RETURN TRADE OFFS

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RISK & RETURN TRADE OFFS

Risk/Return by Investment Style

(USA 2003-13)

Note: Core based on IPD & NCREIF NPI; Core Funds based on PREA/IPD & NCREIF ODCE. Value Add and Opportunistic via Hodes and Weill. Sources: MSCI; Hodes and Weill

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CORE FUND PERFORMANCE IS DIRECT REAL ESTATE

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% pa Direct Core Funds

R² = 0.9783

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-10% -5% 0% 5% 10% 15% 20% 25%

Note: Core based on IPD & NCREIF NPI; Core Funds based on PREA/IPD & NCREIF ODCE. Value Add and Opportunistic via Hodes and Weill. Sources: MSCI; Hodes and Weill

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Direct Real Estate - MSCI, NCREIF

Unlisted Funds - MSCI

Listed Real Estate – MSCI, FTSE/EPRA/NAREIT, Thomson Reuters GPR

Debt - ???

Derivatives - IPD Futures, MSCI Liquid Real Estate Indexes, FTSE Pure Property Indices

For simplicity, analysis focuses on blending direct & listed real estate exposure

GLOBAL DATA AVAILABILITY

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MSCI’S GLOBAL COVERAGE OF DIRECT PROPERTY

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DIVERSIFICATION THROUGH NATIONAL DIRECT PROPERTY

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NATIONAL PERFORMANCE AND MARKET SIZE EXPLAIN CONTRIBUTIONS TO GLOBAL PERFORMANCE

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Use best available quarterly open-market valued data for each country available

IPD Quarterly Property Indexes

• Australia, Canada, Ireland, Japan, Netherlands, New Zealand, UK, USA

National Property Indexes from IPD Global Property Fund Index

• Belgium, Czech Republic, Hungary, Finland, France, Germany, Italy, Poland, Spain, Sweden

IPD Transaction Linked Indexes

• Denmark, Norway, Switzerland

Covers 85% of IPD markets by value and 90% of IPD Global Annual Property Index

QUARTERLY GLOBAL DIRECT PROPERTY DATASET

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QUARTERLY GLOBAL DIRECT PROPERTY DATASETCountry Index CV ($bn) No. Assets Market Size ($bn) Market Weight (%)USA Quarterly Direct 222.3 3,913 2,375 34.2UK Quarterly Direct 217.8 9,746 682 9.8Japan Rolling Annual Direct 112.2 3,245 642 9.2Germany GPFI 3.4 117 390 5.6France GPFI 3.7 95 363 5.2Canada Rolling Annual Direct 107.8 2,325 298 4.3China 353 5.1Hong Kong 282 4.0Australia Rolling Annual Direct 117.2 1,339 215 3.1Switzerland TLI 75.1 4,417 196 2.8Sweden GPFI 0.8 153 2.2Netherlands Quarterly Direct 26.9 2,628 134 1.9Singapore 141 2.0Italy GPFI 0.2 12 111 1.6Spain GPFI 0.4 22 66 1.0Finland GPFI 0.2 8 61 0.9South Korea 57 0.8Belgium GPFI 0.6 23 55 0.8Denmark TLI 11.9 688 52 0.7Norway TLI 14.0 478 46 0.7South Africa 41 0.6Poland GPFI 1.5 100 34 0.5Austria 33 0.5Ireland Quarterly Direct 4.8 361 27 0.4Taiwan 26 0.4Portugal 24 0.4Malaysia 25 0.4New Zealand Rolling Annual Direct 9.8 570 18 0.3Czech republic GPFI 0.3 20 16 0.2Thailand 16 0.2Hungary GPFI 0.3 19 9 0.1Indonesia 10 0.1

85% of measured global market represented on a quarterly basis

Balance between small sample sizes & open market quarterly valuations

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Many options for global listed property indexes

• FTSE/EPRA/NAREIT, Thomson Reuters/GPR, MSCI, etc.

MSCI ACWI REIT Index chosen

• Uses MSCI / S&P Global Industry Classification Standard (GICS)

• Free float adjusted market capitalisation

• Represents 85% of global equity REITs universe

• Around 70 constituents from 46 countries (23 developed & 23 emerging markets)

LISTED REAL ESTATE DATA

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Sovereign Wealth Funds & Large Defined Benefit Pension Funds

• Large with long term investment horizon

• Large direct holdings

Smaller Defined Benefit Pension Funds

• Small with long term investment horizon

• Larger unlisted fund & listed holdings

Defined Contribution Pension Funds – Large with long term investment horizon but need for liquidity buffer

• Large direct holdings but increasing need for listed component

Commingled Fund (Institutional or Retail) – More variety in terms of size & investment horizon

• Smaller funds likely to use listed exposure as the best way to get geographical diversification

DIFFERENT FUND MANDATES & SIZE

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LISTED & DIRECT RETURNS COMPARED

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BLENDED PERFORMANCE BY MARKET SIZE WEIGHTS

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DIFFERENT BLENDS PRODUCE DIFFERENT RETURNSDirect/Listed Std Dev TR (%pa)

100% Direct - 100:0 2.1 4.590:10 2.6 4.080:20 3.4 3.570:30 4.3 2.960:40 5.3 2.350:50 6.3 1.640:60 7.4 0.830:70 8.4 0.020:80 9.5 -0.810:90 10.6 -1.7

100% Listed - 0:100 11.6 -2.6

…and different levels of risk

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RISK-RETURN PROFILE: 2006-2014

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RISK-RETURN PROFILE: 2007-2009

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RISK-RETURN PROFILE: 2009-2014

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SWITCHING STRATEGIES THROUGH THE CYCLE

Total Return of 18.1% pa available

“Passive” market weight provides 2.6% pa

Switching on an annual basis with perfect foresight provides 10.4% pa

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MSCI to develop blended index

• Consultation on sensible blend(s) for publicly available index

Impact analysis of leverage on blended performance

More analysis on switching between listed & direct & listed & other liquid assets

Analysis on regional strategies & mixtures of national markets

Comparison of global blended performance against domestic direct performance

Construction of longer time series

FURTHER RESEARCH

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• Globalisation of real estate investment is a major driving force behind innovative blended strategies

• Large funds can now access global diversification benefits through multiple channels

• Listed real estate is a good way for smaller funds to access global returns

• Listed real estate gives liquidity benefits but at the cost of increased volatility

• Understanding both listed & direct dynamics can lead to outperformance

CONCLUSIONS

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AMERICAS

Canada + 1 416 687 6284

US + 1 212 804 3900

CONTACT US

EUROPE, MIDDLE EAST & AFRICA

UK + 44 20 7336 9200

France + 33 1 58 05 36 90

Germany + 49 691 3385 999

Netherlands + 31 88 328 22 00

Spain + 34 917 610 271

South Africa + 27 11 656 2115

Sweden + 46 8 400 252 30

ASIA PACIFIC

Australia + 61 2 9248 1900

Japan + 81 3 5211 1455

msci.comrealestate@msci.com | + 44 20 7336 4783

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