Mobile Edition
Print
Get the Mag
Weekly Updates3.2. Residential Diversification by Managers and Property Types
The returns, standard deviation and weight of efficient portfolios as well as their mean/ standard deviation ratio and effectiveness of diversification of diversification strategy by managers and property types are shown in Table 4. The dominant portfolio (in terms of mean standard deviation ratio) on this strategy is the portfolio that is based on -0.1 correlation coefficient. Although, this portfolio outperformed virtually all of the naive portfolios based on this strategy, it did not outperform the dominant naive portfolio and one other. Meanwhile, the range of returns on these portfolios is far less than the one achieved by the naive diversifications (2.27 vs 7.84). It is also noted that the dominant efficient portfolio might have performed better than others tested because it invested in all the properties under the three managers' portfolios (8 in all) except one. Thus, there is more opportunity for better spread of assets and risk.
3.3. Comparing the Dominant Strategies
Table 5 compares the dominant naive strategies and the efficient set returns, standard deviations and their effectiveness of diversification for each of the two diversification strategies considered.
The results show that for managers diversification only, the strategy of equal allocation to all managers' portfolio achieved a higher return (19.13 vs 18.04) than the efficient frontier although with a higher risk level (0.257 vs 0.235). For managers and property type diversification, the strategy of equal allocation to all managers with the allocation invested in one property type in each manager's portfolio produced a superior return performance portfolio (portfolio that combines [A.sub.1], [B.sub.2], and [C.sub.3]) than the corresponding efficient portfolio. It turns in a marginally superior return performance (23.19 vs 21.71) for even a lower risk than the efficient portfolios (0.274 vs 0.364). The mean standard deviation ratio however shows slightly different results. While the dominant naive portfolio based on managers and property types diversification outperformed the efficient portfolio based on this strategy (84.635 vs 59.643), the dominant portfolio based on managers diversification only did not outperform the corresponding efficient portfolio (74.436 vs 76.766). The results of the effectiveness of diversification of the dominant strategies also reflect that the naive portfolios on the two strategies are better than their corresponding efficient portfolios. The strategies achieved effectiveness of diversification level of 0.6684 vs 0.6206 and 0.8406 vs 0.7431 for naive and efficient portfolios respectively. The study's analyses therefore suggest that diversification of managers and property types produce improved performance and that efficient portfolios may not, afterall, be superior to all naively diversified portfolios.
4. CONCLUSION
Our analysis of managers' diversification within Nigerian market during the period 1997 - 2001 shows that efficient portfolios (constant correlation model portfolios) outperformed all strategies based on "all allocation in one property manager's portfolio" and the strategy based on "equal allocation to each of the managers". With regards to managers and property type diversification, efficient portfolios outperformed most, but not all, of those strategies based on "equal allocation between managers with the allocation to each manager invested in one property class". Also, efficient portfolios did not outperform the portfolio that was based on "equal allocation between managers with the allocation spread evenly among property type in each manager's portfolio". Thus, this result opens the possibility that an efficient portfolio developed by constant correlation analysis may not be more efficient than a naively diversified portfolio.
While we may attribute the finding in the study to the fact that assets are assumed to be held long (no short sale) the finding may vary if short selling is allowed. Also, the relatively high correlation assumed to be between pair of assets might have been disadvantageous to efficient portfolios in terms of the spread of assets and risk reduction. It has been noted earlier in the study that portfolio efficiency tends to increase with the reduction in the correlation coefficient.
Although, the study did not test the statistical significance of the benefits being found from managers' diversification and examine the effects of cycle on the performance of the portfolios, it has shown that there are benefits derivable from managers' diversification. For investors who therefore welcome every bit of risk reduction regardless of how slight the chance is, managers and property type diversification may be perceived as useful. Further research could be done to test the statistical significance of managers' diversification and can obtain additional evidence as to the ex ante performance of all those strategies tested in this study. In addition, the study can be extended further and enriched with additional property managers and property characteristics.
Received 20 November 2006; accepted 12 June 2007
REFERENCES
Adair, A., McGreal, S. and Webb, J. R. (2006) Diversification Effects of Direct versus Indirect Real Estate Investments in the U.K. Journal of Real Estate Portfolio Management, 12(2), p. 85-90.
Ajala, O. O. (2001) Comparison of Portfolio Performance In Corporate Public and Private Firms: A Case Study of UACN Property Development Company PLC and Wemabod Estate Limited, B.Sc Dissertation of the Department of Estate Management, Obafemi Awolowo University, Ile-Ife.
Ajayi, C. A. (1998) Property Investment and Analysis, De-Ayo Publications, Ibadan.
Brown, G. R. (1997) Reducing the Dispersion of Returns in U.K. Real Estate Portfolios. Journal of Real Estate Portfolio Management, 3(2), p. 129-140.
Brown, R., Li, L. H. and Lusht, K. (2000) A Note on Intracity Geographic Diversification of Real Estate Portfolios: Evidence from Hong Kong. Journal of Real Estate Portfolio Management, 6(2), p. 131-140.
Cheng, P. and Liang, Y. (2000) Optimal Diversification: Is It Really Worthwhile? Journal of Real Estate Portfolio Management, 6(1), p. 7-16.
Conover, M., Friday, S. and Sirmans, S. (2002) Diversification Benefits from Foreign Real Estate Investment. Journal of Real Estate Portfolio Management, 8(1), p. 17-26.
Del Casino, J. J. (1995) Portfolio Diversification Considerations, In Pagliari, J. L. (Jr) (ed), The Handbook of Real Estate Portfolio Management, IRWIN, Chicago, pp. 912-966.
Elton, E. J. and Gruber, M. J. (1981) Modern Portfolio Theory and Investment Analysis, John Wiley & Sons, New York.
Geltner, D. M. (1991) Smoothing in Appraisal-Based Returns. Journal of Real Estate Finance and Economics, 4(4), p. 327-345.
Giliberto, M. and Hopkins, R. E. (1990) Metro Employment Trends: Analysis and Portfolio Considerations, Salomon Brothers Inc. May 14.
Grissom, T. V., Kuhle, J. L. and Walther, C. H. (1987) Diversification Works in Real Estate Too. Journal of Real Estate Portfolio Management, 13(2), p. 66-67.
Hadaway, S. C. (1978) Diversification Possibilities in Agricultural Land Investments. The Appraisal Journal, p. 529-537.
Hargitay, S. E. and Yu, S. (1993) Property Investment Decisions: A Quantitative Approach, E&FN Spon, New York.
Hartzell, D. J., Hekman, J. S. and Miles, M. E. (1986) Diversification Categories in Investment Real Estate. AREUEA Journal, 14(2), p. 230-254.
Hartzell, D. J., Shulman, D. G. and Wurtzebach, C. H. (1987) Refining the Analysis of Regional Diversification for Income-Producing Real Estate. Journal of Real Estate Research, 2(2), p. 85-95.
Lee, S. L. (2005) The Return Due to Diversification of Real Estate to the U.S. Mixed-Asset Portfolio. Journal of Real Estate Portfolio Management, 11(1), p. 19-28.
Lee, S. and Stevenson, S. (2005) Testing the Statistical Significance of Sector and Regional Diversification. Journal of Property Investment and Finance, 23(5), p. 394-411.
Liow, K., Ooi, J. and Gong, Y. (2005) Cross Market Dynamics in Property Stock Markets: Some International Evidence. Journal of Property Management and Finance, 22(5), p. 401-413.
Markowitz, H. M. (1952) Portfolio Selection. Journal of Finance, 3, p. 77-91.
Markowitz, H. M. (1959) Portfolio Selection: Efficient Diversification of Investments, John Wiley & Sons, New York.
Miles, M. E. and McCue, T. E. (1982) Historic Returns and Institutional Real Estate Portfolio. AREUEA Journal, 10(2), p. 184-198.
Mueller, G. R. (1993) Refining Economic Diversification Strategies for Real Estate Portfolios. Journal of Real Estate Research, 8(1), p. 55-68.
Olaleye, A. (2000) A Study of Property Portfolio Management Practice in Nigeria, Unpublished M.Sc Dissertation of the Department of Estate Management, Obafemi Awolowo University, Ile-Ife.
Pagliari, J. L. (Jr), Webb, J. R. and Del Casino, J. J. (1995) Applying MPT to Institutional Real estate Portfolios: The Good, the Bad and the Uncertain. Journal of Real Estate Portfolio Management, 1(1), p. 67-88.
Viezer, T. W. (2000) Evaluating Within Real Estate Diversification Strategies. Journal of Real Estate Portfolio Management, 6(1), p. 75-95.
Abel OLALEYE (1) ([email]) and Bioye Tajudeen ALUKO (2)
(1) Department of Estate Management, Obafemi Awolowo University, Ile--Ife, Nigeria E-mail: a_olaleye2000@yahoo.co.uk
(2) Department of Estate Management, Obafemi Awolowo University, Ile--Ife, Nigeria E-mail: btaluko@oauife.edu.ng
FEED