Optimisation of the investment strategy of the Norwegian Sovereign Wealth Fund by adjusting the real estate quota

Abstract

Purpose

This paper compares the benefits of direct international real estate investments in a mixed asset portfolio from the perspective of a passive investor with high and low bond allocation.

Design/methodology/approach

Due to high data availability and its professionalism, the Norwegian sovereign wealth fund was used as a representative example. Real estate indices from 8 countries were used for the portfolio analysis. The data were desmoothed according to Geltners’s 1993 approach.

Findings

The optimal real estate ratio in the present case is around 20–55%. However, this is strongly dependent on the bond ratio of the multi-asset portfolio. Portfolios with a high equity ratio benefit more from the additional direct real estate investments than portfolios with high bond ratios.

Research limitations/implications

A rebalancing of individual stocks and bonds was not analysed. Only indexes from MSCI (Morgan Stanley Capital International) were available.

Practical implications

Concludes that the weighting of stocks and bonds has a strong influence on the optimal real estate ratio and therefore structural changes that affect this weighting.

Originality/value

The originality of the paper lies in the analysis with different weights of stocks and bonds, the consideration of 8 real estate markets and the observation period. The results of the work highlight areas of interest for further research.

Citation

Rehers, S., Lekander, J. and Bendiek, A.B. (2024), "Optimisation of the investment strategy of the Norwegian Sovereign Wealth Fund by adjusting the real estate quota", Journal of Property Investment & Finance, Vol. 42 No. 1, pp. 50-66. https://doi.org/10.1108/JPIF-07-2023-0065