REITs in a Multi-Asset Portfolio: An Asset Allocation Framework for Inflationary Regimes

Equity real estate investment trusts (REITs) are used by investors to increase diversification, income, and inflation protection in a multi-asset portfolio. However, REITs have experienced diminished diversification properties over time, exhibiting higher correlation to traditional assets. What role should REITs play in a multi-asset portfolio and how should the allocation be funded? From a strategic standpoint, our results indicate REITs should be funded from a balanced combination of equities and long-dated fixed income to reduce unintended active exposure to equity and duration risk versus a reference benchmark while preserving inflation protection benefits. From a dynamic allocation standpoint, REITs’ performance is consistent with cyclical and inflation-linked factors such as credit risk, small-cap value equities, and breakeven inflation expectations. Starting from a traditional 60/40 benchmark, we document statistically significant excess returns from REITs during cyclical recoveries and inflationary regimes, directionally consistent with breakeven inflation expectations, with information ratios between 0.40 and 0.60 over the period 1998–2024.