Gillian Tett at the FT recently reviewed an academic paper titled “The Rate of Return on Everything, 1870-2015”, which reviewed the performance of major asset classes over the past 145 years.
Here is an extract from her article (my emphasis):
…equities and housing have very different levels of correlation. From a (very) long-term perspective, both asset classes have produced similar returns since 1870, averaging out at about 7 per cent per annum across these 16 countries. But equity markets around the world have become tightly interlinked with each other: country co-movements rose from 0.4 in the middle of the previous century to 0.8 this decade (note however that correlations have declined drastically this year).
Property markets, by contrast, are not correlated: country co-movements have stayed between zero and 0.2 in the past 50 years. Moreover, property is also only lightly correlated to business cycles and other asset classes. This suggests that if an investor wants truly to diversify their portfolio, they should look beyond securities; buying real estate everywhere from Manhattan to Mongolia was a better hedge in the 20th century.
A hedge! Exactly what I am looking for. Could real estate offer me a hedge against frothy equity markets?
Well, I’m not in a position to build out a global property portfolio. Could REITs be the answer?
After a couple of minutes on google and I came across this from a December 2008 NYT article (my emphasis):
Brad Case, vice president for research and industry information at the National Association of Real Estate Investment Trusts, agreed that REITs have been moving more in lock step with the rest of the financial markets, but says that this has been only a recent change.
He described the 2008 performance of REITs as akin to having two separate markets.
“The first nine months were largely a normal market,” he said, noting that equity REITs actually gained 6.6 percent from the end of February through September. But by end of November…the market was down 58 percent from its peak in January 2007.
All REIT property types have been hit hard. This year through Thursday, the industrial sector was down a staggering 81.11 percent; lodging and resorts dropped 66.57 percent; and regional shopping malls were off 66.34 percent. The best performer — that is, the sector with the smallest losses — was self-storage, down 14.59 percent.
So it seems REITs may not save my portfolio when traders are going full Cramer (full Cramer starts at the 2 minute market).