Asset Allocation and Diversification by Real Estate Sector Within a Portfolio: Two Australian Case Studies

The research results presented in this paper are a subset of a more extensive investigation of asset allocation and investment diversification in a pooled or mixed asset portfolio including bonds, equities and real estate in real property form, and listed and unlisted property trusts as they are termed in Australia. Australian property trusts are analogous to Real Estate Investment Trusts (REITs) in the United States. This empirical research study is exploratory in nature, and concentrates specifically on diversification and optimal portfolio management within the property asset class of two separate property portfolios: Portfolio I: One of Australia's largest pension or superannuation funds, with commercial, industrial and retail sector holdings in property. and Portfolio II: A large property trust, listed on the Australian Stock Exchange, with both retail and commercial sector holdings. The investment performance data utilised in the study is normally confidential and is regarded as commercially sensitive. Consequently the two organisations have made it avaialble for this applied university research purpose on condition that some appropriate level of anonymity is preserved. In order to keep faith with this legitamite constraint, this paper concentrates on macro-performance at the overall sector level. No details at an individual property level are given. The results suggest a prominent diversification role for the retail sector of real estate in at least these two property portfolios in Australia during the period from approximately 1981 to the present. Performance data for Portfolio II is also presented for the period from 1973 to 1991.