Key takeaways:
- The PCS Team has found that 80% of clients’ portfolios do not have an allocation to property.
- Steady rental income streams from listed property contribute to recurrent income within a portfolio.
- Cyclical by nature, the asset class remains undervalued and is geared up for recovery when rates fall.
Transcript
Humans spend most of our lifetimes inside buildings of one type or another, yet properties make but a small portion of diversified investment portfolios. In fact, in our portfolio consultations, we find that there is no allocation to properties in about 80% of all portfolios we come across.
Amongst equity allocation, properties show lower correlations, which has diversification benefits to a portfolio, which we can see using our Janus Henderson EDGE application:
As central banks raised interest rates to levels not seen since before the Great Financial Crisis in their mission to combat inflation, global properties suffered. Higher rates mean higher financing costs, the quality of the assets matters more now than when rates were low. This quality is likely reflected in lower debt levels, the overall sustainability and efficiency of the asset, and, as the perennial saying in real estate goes: Location, Location, Location! Desirable quality assets will likely see sustained demand over time.
Let’s turn to Allocation, Allocation, Allocation! What effects do properties have on a portfolio?
First, we could see an increase to the recurring income element of a portfolio, income which is generally indexed to inflation and investors can then choose to use this income or potentially reinvest it.
But there are other underlying changes which we can uncover making use of Janus Henderson Edge.
Allocating 20% to listed properties in a portfolio consisting only of diversified global equities alters the market cap make up, adding more mid-and-small cap exposure and lowering the weight in large caps.
Real estate is classified as a cyclical sector, so the overall cyclicality of the portfolio increases, going from 72% to 78%.
Once again, leveraging the power of Janus Henderson Edge, we can see how the Global Equity Index has historically behaved from a size and style perspective over the past five years. The index has consistently shown a large cap blend type of behaviour.
Adding 20% to properties results in a change in behaviour. We see some more dispersion with slight tilts to either value or growth during different periods. And confirming the change in market cap exposures we saw earlier; we see that the dots appear to shift down a bit more to account for the increase small-and mid-cap exposure.
Allocating to properties results in an increase of the portfolio’s overall recurrent income, accompanied by higher sensitivity to markets and the market cycle, something that we advocate should be monitored constantly. Should you want to understand what an addition of properties can do to your portfolio and how we can help you monitor the changes, feel free to reach out to your client relationship manager to arrange a custom consultation with the Janus Henderson Portfolio Construction & Strategy Team.
Source: Janus Henderson EDGE report, at December 2023.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
Marketing Communication.