The effects of adding real estate into mixed‐asset portfolios in South Africa

Abstract

PurposeThe purpose of this paper is to examine the performance of asset classes in the South African investment market and assess the diversification benefits from adding listed property stock into domestic mixed‐asset portfolios.Design/methodology/approachThe data sets comprise of quarterly returns on property listed stock, all share, all bond and 90 day Treasury bill for the period of January, 1999 to December, 2009. Return‐risk performance of all the assets were compared using mean return, standard deviation, mean standard deviation ratio, coefficient of variation and correlation coefficient. To determine return enhancement and risk reduction benefits of property listed stock in mixed‐asset portfolios, 22 naïve portfolios (17 with property stock and five without) were constructed and, their return and risk levels, obtained using Markowitz's mean variance analysis, were compared.FindingsThe results showed that there was evidence of superior return and risk‐adjusted performance of real estate stock over other assets. Also, adding property stock into mixed‐asset portfolios was found to have produced enhanced and statistically significant risk‐adjusted returns but minimal and insignificant risk reduction benefits. These results however are conditional on the percentage allocation to real estate and the asset class replaced.Research limitations/implicationsThe study has implication for investors. They could consider the inclusion of listed property stock in their portfolios with the expectation of a significant risk‐adjusted return enhancement but marginal risk reduction.Originality/valueThe paper is one of the few attempts at assessing the diversification benefits of listed property stock, especially from the perspective of African emerging market.