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| Real Estate versus Financial Asset
Returns and Inflation: Can a P* Trading Strategy Improve REIT Investment Performance? Author: Michael T. Bond and James R. Webb Start Page: 327 Abstract: The ability of a
financial or real asset to provide a rate of return above the rate of inflation is crucial
to investors. The financial literature on the inflation-hedging effectiveness of various
investments suggests that real estate acts as a hedge against inflation on a
period-by-period basis, while financial assets do not. Given this, an investor who could
accurately forecast changes in inflation, and therefore alter his/her investment portfolio
between real estate and financial assets, should be able to significantly improve
portfolio returns. Recently, a new method of measuring potential inflation has been
developed by the Federal Reserve Board. Dubbed P*, it relates long-run spending in the
economy to long-run output and gives an implied value for future inflation. In this study,
the accuracy of P* in forecasting prices is compared to conventional forecasts of
inflation. The P* variable is then used to generate a decision rule for investors in terms
of holding financial assets (which performs well in periods of low or falling inflation)
and real estate (which has been identified as an asset that behaves as an effective hedge
against inflation). The results for this strategy are then contrasted with the performance
of selected assets under a simple buy-and-hold strategy. |
