There are plenty of reasons why owning direct real estate inside a registered mutual fund could present challenges to a portfolio manager, but Nuveen is focusing on the potential upside by adding real estate to it TIAA-CREF Life Cycle Funds.
Since securing regulatory approval last fall, Nuveen's target-date funds have built up a 1% position in individual properties, with a goal of reaching a 5% weighting in direct real estate within two years.
"We believe exposure to direct real estate alongside investments in equity and fixed income is central to building a well-diversified, long-term portfolio for investors," said John Cunniff, portfolio manager of TIAA-CREF's target-date fund series.
The appeal of direct real estate ownership, as opposed to a real estate investment trust, is similar to that of an alternative or hedging strategy, according to Mr. Cunniff.
Unlike REITs, which can be as volatile as equities, the reduced liquidity of individual real estate holdings can act as a ballast for a portfolio by reducing overall volatility while adding diversification. Because of the lower turnover of real estate, the price presents a more stable path, which Nuveen is hoping will help calm investor nerves during times of market turbulence.
But a smoother price trend doesn't necessarily mean a trade-off of lower returns, according TIAA-CREF's research.
As a diversification tool, over the 20-year period through 2016, direct real estate had a 0.23 correlation to U.S. equities, a 0.12 correlation to non-U.S. equities, a 0.13 correlation to REITs, and a negative 0.03 correlation to U.S bonds.
In terms of performance over the same period, direct real estate produced an annualized return of 9.3%, which compares to 7.9% for U.S. equities, 5.1% for non-U.S. equities, 9.7% for REITs and 5.3% for U.S. bonds.
The flipside of holding direct real estate in a registered fund is that the portfolio managers could find themselves in a tight spot in the event of a market selloff, according Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
"Real estate can offer diversification, but any nonlisted investment comes with some liquidity risk," he said.
Not all fund complexes would have the resources or capabilities to invest directly in real estate. It can take months to research and purchase properties, and could take a year or more to sell a position.
At TIAA-CREF, the real estate investments are being made through TH Real Estate, which has been managing real estate investments for institutional investors for more than 70 years, and is the world's third-largest real estate investor.
That pedigree, combined with the fact the direct real estate is held in retirement-account-focused target-date funds, should minimize the liquidity risk, according to Mr. Rosenbluth.
"For target-date funds, in theory, management should have a good line of sight as to when it has to increase and decrease the real estate exposure," he said. "But that assumes investors are going to hold on for the long term."