S&P Global Index Review

S&P Global Index Review

The Global Index Review is designed for money managers and derivative traders to help them assess the performance and correlations of the S&P indices against other popular indices. Published quarterly, the Global Index Review provides a graphic summary of each Standard & Poor’s equity index and compares performance, where appropriate, against other leading indices around the world. It includes data and comparative analysis on the S&P Global 1200, S&P/Citigroup Indices, regional components, as well as sector, style and domestic indices with indices from MSCI, FTSE, Russell, Wilshire, Dow Jones STOXX, and Nikkei. The Global Index Review offers comparative performance, portfolio characteristics, sector weights, tracking statistics and correlations. For easy referencing, this publication is broken into regional chapters
including:

- Global Indices
- U.S. Indices
- European Indices
- Japanese Indices
- Canadian Indices
- Australian Indices
- Asia and Latin America
- Alternative Indices

S&P Alternate Assets Report

S&P Alternate Assets Report

The quarterly S&P Global Alternative Assets Report provides institutional investors with comprehensive performance analysis across a number of alternative asset classes.

Global alternative assets included in this issue:

S&P Listed Private Equity
S&P Global Infrastructure
S&P MLP
S&P U.S. Preferred Stock
S&P/TSX Preferred Share
S&P Global Timber & Forestry
S&P Select Frontier
S&P Global Property 40

Performance of Canadian E-REITs

Performance of Canadian E-REITs

Lawrence Kryzanowski
Finance Department, John Molson School of Business, Concordia University,
1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada, H3G 1M8
E-mail: lkryzan@alcor.concordia.ca.
Margarita Tcherednitchenko
Finance Department, John Molson School of Business, Concordia University,
1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada, H3G 1M8
E-mail: cheritka@yahoo.com

INTERNATIONAL REAL ESTATE REVIEW
2007 Vol. 10 No. 2: pp. 1 - 22

The return performance and factor sensitivities of Canadian equity real estate investment trusts (E-REITs) are examined. Today, typical and average Canadian E-REIT IPOs are correctly priced based on first-day and subsequent short-run returns. The overpricing evident earlier in the 1993-96 period for typical and average E-REIT IPOs has corrected. E-REITs are equity investments with about one-half the market risk, and greater sensitivity to interest-rate changes, than the S&P/TSX Composite Index. E-REITs outperformed the S&P/TSX Composite over the 1996-2004 period on a return, risk, and market- and/or risk-adjusted basis. Thus, E-REITs provided material diversification benefits with no sacrifice in return, when added to a common stock portfolio during the studied period.

Does the Composition of the Market Portfolio Matter for Performance Rankings of Post-1986 Equity REITs?

Does the Composition of the Market Portfolio Matter for Performance Rankings of Post-1986 Equity REITs?

Justin D. Benefield, Randy I. Anderson , Leonard V. Zumpano, Journal of Real Estate Portfolio Management, Volume 13, no. 3.

Executive Summary. Real estate investment trust (REIT) research indicates that performance rankings do not differ between market proxies containing real estate and the Standard and Poor’s 500, while mutual fund research shows that the proxy chosen significantly impacts performance rankings. Previous REIT performance ranking studies used rather obscure market indices, and only included time periods prior to the Tax Reform Act of 1986. Common market proxies are used to address whether the proxy chosen matters in REIT performance studies. Performance rankings utilize standard singlefactor methodologies and, where possible, their multifactor equivalents. Across all comparisons, results indicate that performance rankings of post-1986 equity REITs are insensitive to the market proxy chosen.

Do REITs Behave More Like Real Estate Now?

Do REITs Behave More Like Real Estate Now?

Tsai, I-Chun, Chen, Ming-Chi and Sing, Tien Foo, (November 2007)

Abstract

This paper applies the Time Varying Coefficient (TVC) approach to examine the systematic risks of the National Association of Real Estate Investment Trusts (NAREIT) return index using the Capital Asset Pricing Model (CAPM) framework. We found that the systematic risk of Real Estate Investment Trusts (REITs) is time varying with the REIT-beta declining over time. The declining beta reflects the greater acceptance of REITs as an important asset class in investors' portfolios. Investors would accept a lower risk premium because investors are better able to price the underlying assets the longer REIT assets are securitized. The results support the view that the real estate securities behave more like real estate and less like the general stock market.

Private Equity and Strategic Asset Allocation

Private Equity and Strategic Asset Allocation

Tom Idzorek, CFA, V.P., Director of Research & Product Development, Ibbotsen, October 31, 2007

Executive Summary

This paper studies the role of U.S. Private Equity and Non-U.S. Private Equity in a strategic asset allocation. There is relatively little guidance in the literature on how much investors should allocate to private equity in a strategic asset allocation setting because of 1) confusion between the private equity asset class and private equity funds and 2) considerable debate over historical returns. Private equity is both an asset class and an investment strategy. Distinguishing between the private equity asset class and the private equity investment strategy can be confusing and creates challenges for asset allocators. Ideally, one could invest in a basket of all private corporations in which the weights of the companies in the basket are based on their true values. Such a basket would be a true representation of the private equity asset class. When investors make an allocation to private equity, it is not a passive investment in the basket of all private companies that form the private equity asset class. Rather, for most investors, the allocation to private equity is an investment in a skill-based strategy in which the two primary sub-strategies are leveraged buyouts and venture capital. The fragmented structure of the private equity market is such that private equity investors cannot fully-diversify away from private company specific risk; thus, all private equity investments are a mixture of systematic risk exposure to the private equity asset class and to private company specific risk. Securitization is changing the private equity asset class and, over time, what was once an alpha strategy will become a traditional beta asset class. In this paper, we use two new indices to proxy the private
equity asset class – the Red Rocks Listed Private Equity IndexSM (LPE IndexSM) for U.S. private equity and the Red Rocks International Listed Private Equity IndexSM (International LPE IndexSM) for non-U.S. private equity. The listed private equity indices may more accurately reflect the performance characteristics, especially the volatility, of the private equity asset class than appraisal-based private equity indices. In a series of historical optimizations, we find that including U.S. Private Equity in the opportunity set would have dramatically improved the risk and return characteristics over the past 10 year period. From the beginning of 1997 to the end of 2006, U.S. Private Equity and Non-U.S. Private Equity were the best performing asset classes in our opportunity set, although the performance of the private equity proxies appears to be highly sensitive to the weighting scheme of the proxies. This sensitivity highlights that all private equity investments still contain a high level of specific risk. Over time, we think securitization will reduce the amount of specific risk associated with private equity portfolios. In a forward-looking optimization using a set of returns based on a global implementation of the CAPM, the asset allocations with a standard deviation below 19% were only slightly improved by including private equity in the opportunity set. The benefit of including private equity in the opportunity set is most significant for higher risk, equity-centric asset allocations. Finally, listed private equity will make it possible to apply tactical asset allocations to the asset class.

Portfolio Construction for Taxable Investors

Portfolio Construction for Taxable Investors

Scott J. Donaldson, CFA,CFP, and Frank A. Ambrosio, CFA, Vanguard Investment Counseling & Research (2007)

Executive summary. Most investment portfolios are designed to meet a specific future financial need—either a single goal or a multifaceted set of objectives. To reach those goals and objectives, a disciplined method of portfolio construction must be established that balances the potential risks and returns of various types of investments. This paper reviews various aspects of our research involving five major investment decisions that need to be made, in successive order, in the portfolio construction process. The decisions are:

Asset allocation—Choosing asset-class weights: equities, fixed income, cash, and so on.

Sub-asset allocation—Choosing investments within an asset class, such as U.S. or international equities; or large-, mid-, or small-capitalization equities.

Active and/or passive allocations—Choosing indexed and/or actively managed assets.

Asset location—Deciding on the placement of investments in taxable and/or tax-advantaged accounts.

Manager selection—Choosing individual managers, funds, or securities to fill allocations.

The top-down order in which these decisions are made is important in establishing a well-constructed portfolio. Many investors use a bottom-up approach, placing more emphasis on manager/security selection or sub-asset allocation (based on an investment’s recent returns) than on asset allocation, the most important portfolio decision. However, in using a bottom-up approach, the selection of the investments—potentially the more uncertain part of portfolio construction—would then determine the more important part—the overall asset allocation. After deciding the asset allocation of the portfolio, it is important to keep in mind that broad diversification, with exposure to all parts of the stock and bond markets, is a powerful strategy for managing portfolio risk. Diversification across asset classes reduces a portfolio’s exposure to the risks common to an entire asset class. Diversification within asset classes reduces a portfolio’s exposure to the risks associated with a particular company, sector, or market. This diversification can be achieved through index and/or actively managed investment strategies. The decision to purchase certain investments within either tax-advantaged and/or taxable accounts, known as asset location, is a valuable tool to increase potential after-tax returns. This can be achieved by placing tax efficient assets in taxable accounts and tax inefficient assets in tax-advantaged accounts. Selecting specific investments to represent the various market segments should come last. A common error in portfolio construction is that of choosing specific investments that may appear to be worthwhile individually, but make little sense when combined in a portfolio. In the end, this collection of investments does not necessarily form a coherent asset allocation or sub-asset allocation that matches the investor’s objectives and risk tolerance.

Economic Integration and Mature Portfolios

Economic Integration and Mature Portfolios

Christelis, Dimitris, Georgarakos, Dimitris and Haliassos, Michael, (January 31, 2008). Center for Financial Studies, Forthcoming

Abstract:

This paper documents and studies sources of international differences in participation and holdings in stocks, private businesses, and homes among households aged 50 in the US, England, and eleven continental European countries, using new internationally comparable, household-level data. With greater integration of asset and labor markets and policies, households of given characteristics should be holding more similar portfolios for old age. We decompose observed differences across the Atlantic, within the US, and within Europe into those arising from differences: a) in the distribution of characteristics and b) in the influence of given characteristics. We find that US households are generally more likely to own these assets than their European counterparts. However, European asset owners tend to hold smaller real, PPP-adjusted amounts in stocks and larger in private businesses and primary residence than US owners at comparable points in the distribution of holdings, even controlling for differences in configuration of characteristics. Differences in characteristics often play minimal or no role. Differences in market conditions are much more pronounced among European countries than among US regions, suggesting significant potential for further integration.