US Market Report - Do High Performing REITs Offer Diversification? - June 2012

Jun 27, 2012

Some portfolio managers think of REITs as a source of good returns, having low correlation with the broad equity market. This market report examines these claims by looking at sources of outperformance as well as sources of return, risk and correlation over the past five years. Using the Barra US Equity model (USE4), we show that recent REIT performance was mainly due to an industry effect; over the long run, exposures to style factors heavily influenced the return and risk of a REIT portfolio. Since 2007, the correlation of REITs with the rest of the US equity market has been consistently higher than advertised, which should give investors cause to question REITs as a reliable layer of diversification.