CBRE Global Investors has released new research examining international portfolio diversification. The latest research builds on previous work that had shown international diversification works for investors, this time specifically looking at the number of assets that are required to build a successful portfolio.
In essence the study details how to reduce asset-specific risk. Results show that to achieve a 90 percent reduction of diversifiable risks managers should look to invest in 11-18 assets, depending on the region.
The research looks across several countries as well as throughout the various stages of an economic cycle and explores the differences if portfolios are dominated by a few large assets, and at the situation for an investor who wants to reduce the maximum risk.
Pieter Roozenboom, Head of Global Separate Accounts said: “We know sometimes people can be sceptical about diversification, we often hear that in a crisis it is least effective, but we have found that the optimal portfolio size does not change during a crisis. This research allows us to examine how it works –and more importantly it looks at the parameters to ascertain and manage risk to ensure optimum returns.
“As Head of Global Separate Accounts I’m often asked ‘how many assets do I need for optimum diversification?’ and this study helps us to answer that question. At CBRE Global Investors we are taking the mantra of “diversification works” to the next level and are constantly assessing the parameters and metrics to help reduce risks – which is what you would expect from a global leader.”
The study also focuses on portfolio construction, like asset size, tenant diversification, portfolio lease profile, etc. For example asset size, whilst it remains clear that when portfolios consist of very different asset sizes, more assets will be needed, enlarging a portfolio for the sake of it is not enough for risk diversification; e.g. adding one large asset to an existing portfolio can undermine the diversification benefit already achieved.
RARE, CBRE Global Investors’ portfolio management and risk assessment tool, is used to recommend target markets and sectors that it believe will create the best combination of risk and returns with the portfolio objectives.
Whilst this is not the first research of its type most have previously focused on US and UK markets because of the amount of data available. However, due to the large number of assets that CBRE Global Investors manage internationally they are in a unique position to deliver truly holistic research. This research does not rely on assumptions that results for the UK and US apply to other countries, rather it has used empirical evidence to produce its results.
