Tackling Home Bias with Global REITs

 In Market and Investment Insights

Despite greater asset flows to non-U.S. stocks, our research shows home bias persists in advisor portfolios. To diversify, Adam Hetts, Head of Portfolio Construction and Strategy, and Greg Kuhl, Portfolio Manager of Global Property Equities, suggest some investors may want to consider global real estate investment trusts, or global REITs.

Key Takeaways

  • U.S. equity outperformance has led to many U.S.-based investment portfolios having a home bias, even as recent asset flows favor international stocks.
  • To help address this imbalance, some investors may want to consider global real estate investment trusts, or global REITs.
  • Global REITs may provide geographic diversification and help diversify equity risk, which could be especially important as growth stocks have come to dominate the U.S. equity market.

After years of U.S. equity outperformance, it may come as no surprise that many U.S.-based portfolios have a so-called home bias. Based on analysis of thousands of advisor portfolio models, our Portfolio Construction and Strategy team calculates that the average advisor’s global developed equity allocation consists of only 22% international stocks, compared with 38% for the MSCI World Index℠.

Source: Janus Henderson Portfolio Construction and Strategy. As of 12/31/18.

The numbers become all the more striking when you consider that in 2018 international equity funds saw net inflows of $87.9 billion while investors added only $32.4 billion to domestic stock funds, according to Morningstar1. In other words, even as investors direct more money overseas, equity allocations still remain heavily tilted toward the U.S.

How can advisors address this disparity? We believe investors with the appropriate risk tolerance may want to consider global real estate investment trusts, or global REITs. These investment vehicles – companies that own and often operate income-generating real estate – can provide broad geographic diversification, potentially mitigating macroeconomic risks. Consider: the FTSE EPRA Nareit Global Real Estate Index, a benchmark for global REITs, consists of 53% non-U.S. assets, based on market capitalization.

What’s more, REITs are not highly correlated to U.S. equities. (Correlation is a measure of how closely assets move in tandem with each other, with 1 representing perfect correlation and 0 suggesting no correlation.) Non-U.S. REITs have especially lower correlation to the S&P 500® Index, a benchmark for large-cap U.S. stocks.

Source: Bloomberg. As of 9/30/18.

In today’s market, where growth stocks have come to dominate the U.S. equity market, this added layer of diversification could be beneficial, in our opinion. To learn more, as well as where we are currently finding opportunities among global REITs, read our article, Addressing Your Home Bias with Global REITs.

1 https://www.morningstar.com/content/dam/marketing/shared/pdfs/fundflows/Direct_Asset_Flows_December18.pdf?cid=EMQ_

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Real estate securities, including Real Estate Investment Trusts (REITs) may be subject to additional risks, including interest rate, management, tax, economic, environmental and concentration risks.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
MSCI World Index℠ reflects the equity market performance of global developed markets.

C-0219-22587 03-15-20

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