Ethan Lai
Senior Research Analyst, Real Assets
Key takeaways:
- Concentration rising: The top 10 holdings in the FTSE EPRA Nareit Developed Index grew from ~20% to ~33%, while the Diversification Factor dropped from 120 to ~60 — signalling reduced effective breadth
- Target Diversification restores balance: Applying targets of 100 / 150 / 200 boosts the Diversification Factor back to 100–200, reduces US exposure to 46%, and maintains a low tracking error (~0.6%)
- Stronger performance: A 2005–2025 back-test shows higher cumulative and annual returns, slightly lower volatility, and ~40 bps more in dividend yield
Points of differentiation:
- First of its kind: The first real estate study to apply FTSE Russell’s Target Diversification model
- Pure rules-based approach: Adjusts weights directly — no caps, no optimisation — preserving index representativeness
- Customisable risk and yield: Multiple targets let investors fine-tune exposure, yield, and regulatory alignment—without sacrificing liquidity or increasing costs
What does our research mean for investors?
Rising issuer and regional concentration no longer needs to be the price of benchmark fidelity. Target Diversification offers a scalable, rules-based solution to rebalance portfolios, enhance income, and modestly improve risk-adjusted returns — while preserving the liquidity passive strategies require.
