The Markets April 2, 2012

Wilshire Touts Use of REITs in TDFs

The best possible target-date fund performance is critical to those saving for retirement.  
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According to research released by Wilshire, a target-date fund (TDF) portfolio, including U.S. Real Estate Investment Trusts (REITs), would produce an ending portfolio value nearly 10% higher than a portfolio without REITs over a 35-year period (1976 to 2010), while also reducing risk.

A $10,000 initial portfolio using REITs would have generated $322,279 in retirement savings over 35 years, or $28,634 more than a portfolio without REITs. The improvement is due to REITs’ high and stable dividends, long-term capital appreciation, inflation protection and low to moderate correlation with other assets invested in a well-diversified portfolio.

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Depending on the number of years to retirement, optimally allocated TDFs should include REIT allocations of nearly 9% to nearly 18%, according to Wilshire’s research. While a number of leading TDF providers have included REIT allocations in their funds, many of the largest TDF providers are giving up performance because they are under-allocated to REITs.

“It’s time for target-date funds to take a closer look at REITs,” said Cleo C. Chang, managing director and head of investment research for Wilshire Funds Management, who conducted the research. “They’re a triple play asset class, providing income, capital appreciation and inflation protection.”

 

About the Research  

According to Wilshire, one of the unique attributes of TDFs is the periodic adjustment of asset allocations over time, driven by the glide path, to reflect the decreasing risk tolerance of investors as they approach and then enter their retirement years. To evaluate the appropriate role of REITs and listed real estate securities in the glide path asset allocations of TDFs, Wilshire constructed two sets of portfolios utilizing both Mean Variance Optimization (MVO) and a methodology called Surplus Optimization (SO) for different investment horizons.

According to Wilshire, SO offers a better way to allocate assets for investors near or already in retirement, with shorter investment horizons, greater clarity of living expenses and life expectancy, and a lower tolerance for risk.

Using both methodologies, Wilshire found that retirement portfolios constructed with REITs substantially outperform those without REITs while reducing the level of risk. The 35-year historical record (1976 to 2010) of investment performance reveals that optimal allocations to REITs using SO range from 9% for investment horizons of five to 10 years to as much as 18% for investment horizons of up to 40 years.

Over the 35-year investment period, the TDF portfolio including U.S. REITs using SO would have resulted in a portfolio value at the end of 2010 that was 9.75% higher than that of the MVO portfolio without U.S. REITs and 5.95% higher than that of the MVO portfolio including U.S. REITs.

The full Wilshire research report on target-date funds is available free of charge at www.REIT.com/TargetDate.

 

Data & Research April 2, 2012

Financial Crisis Changed View of VAs

The 2008 financial crisis changed advisers’ and investors’ attitudes about variable annuities (VAs), according to a survey.  
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The survey, conducted by AllianceBernstein L.P. (AllianceBernstein) and the Insured Retirement Institute (IRI), found that investors and advisers found more value in variable annuities after the 2008 financial crisis. Amid the crisis, many strategies were less effective in limiting losses than expected—or made things worse. As advisers looked for a way to avoid a repeat of this experience, they focused more closely on the design of the variable annuity, with its guarantee of retirement income.

“Our survey found that more and more financial advisers are turning to VAs as a sound portfolio solution because they provide guaranteed income and can help clients attain financial security in retirement,” said IRI President and CEO Cathy Weatherford.

The survey separated participants into three categories: sellers (sold more than 10 contracts per year); dabblers (sold between one and 10 contracts per year); and non-sellers (sold zero contracts).

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Financial advisers were surveyed about their feelings and their clients’ feelings toward guaranteed income solutions and VAs. Survey findings included:

  •  Seventy-three percent of dabblers and 79% of sellers said they never want their clients to have a year like 2008 again and will therefore continue to recommend VAs;
  •  Fifty percent of respondents said they started recommending VAs more because their clients are demanding “guaranteed investments;”
  •  Fifty-seven percent of respondents said they increased their use of VAs because the “designs have become more attractive;”
  •  Forty-nine percent of dabblers have increased their recommendations for VAs since the credit crisis;
  •  Sixty percent of sellers have increased their recommendations for VAs since the credit crisis;
  •  Forty-two percent bring up VAs in “every conversation” with clients and see them as an important part of financial planning solutions;
  •  More than seven out of 10 sellers have more than a decade of experience in selling VAs, compared with roughly half of non-sellers and dabblers;
  •  The average allocation for new clients is 29% VAs, 14% mutual funds, 14% IRAs, 8% life insurance, 6% unified managed accounts/mutual fund wrap accounts and 29% other;
  •  Approximately a quarter of sellers had assets under management in excess of $100 million;
  •  Nearly a third of sellers had annual revenues (fees plus gross commission) in excess of $500,000; and
  •  Sellers have twice the number of high-net-worth clients (with investable assets between $1 million and $29 million) of dabblers and one-third more than non-sellers.

More than 500 advisers participated in the online survey, commissioned by AllianceBernstein and IRI and conducted by market research firm InsightExpress.

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