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Declining interest rates have hurt pension fund investments, making it difficult to yield large returns, so funds have turned to alternative investments like real estate.
A recent study revealed REITs are the top performing asset class in pension funds, despite the fact they account for less than 1% of fund allocations, CEM Benchmarking researcher Alex Beath tells Bisnow.
“The best-performing asset class for the past 17 years have been REITs yet funds for the most part don't invest in them," Alex tells us. "Twenty years ago pension funds were known as the 60/40 entities—60% equity and 40% stock—but since that time there has been tremendous change.”
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The CEM study, released this month in collaboration with NAREIT, analyzed the performance of 200 public and private funds with more than $3 trillion in combined assets over a 17-year period. It found that listed equity REITs were the surveyed funds’ best-performing asset—generating net returns of 11.95% on an annual basis.
“As long as interest rates are low it creates challenges for pensions, so they’ll need to do something other than invest in pure bond portfolio to pay for liability,” Alex says.
Private equity investments follow close behind REITs with an 11.37% net return; pension funds allocate near 6% of its portfolio to private equity, CEM reports. “There are less expensive ways to get similar returns, and in some case with less risks, that pension funds should look into,” Alex says.
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