REITs and the Mixed-asset Portfolio over the Business Cycle

This study examines whether an investment in real estate investment trusts (REITs) would have improved the performance of the US 60/40 mixed-asset portfolio over four phases of the business cycle (early/late recession and early/late expansion). Empirically we find that the risk and return characteristics of the various asset classes are highly dependent on the phase of the business cycle. For instance, REITs returns were highest during the early-expansionary phase of the business but least in the late-recessionary phase. Stocks performing best in the late-expansionary phase and least in the late-recessionary phase of the business cycle, whereas bonds achieved their best returns in the late-recessionary phases and least in the late-expansionary phases. We also show that although an allocation to REITs of between 5%and 15%would have increased the Sharpe performance of a 60/40 mixed-asset portfolio in the late-recessionary and late-expansionary phases of the business cycle a similar allocation in the early-recessionary and early-expansionary phases would have resulted in a decline in Sharpe performance. Lastly, although, the phases of the business cycle were evaluated ex-post, the finding that an allocation to REITs can have both positive and negative effects on portfolio performance is of significant importance for the decision-making of portfolio management.