Australian securitised property funds: an examination of their risk‐adjusted performance

Abstract

PurposeThis paper aims to gain exposure to Australian real estate investment trusts (A‐REITs). Many institutional investors make use of securitised property funds as they employ experienced property professionals with specialist knowledge of underlying property fundamentals, direct property markets and the 30‐plus A‐REITs. As securitised property funds operate in a competitive environment, investment performance benchmarks are important.Design/methodology/approachTo add to the familiar risk and return benchmarks, the risk adjusted performance (RAP) measure first outlined by Modigliani and Modigliani provides an additional and valuable return measure to a definite level of risk. This research selected 16 wholesale securitised property funds each with seven years of continuous quarterly total return data.FindingsOverall a large proportion of the selected funds (14 out of 16), on average, outperformed the market benchmark return (14.53 per cent) with the worst fund marginally under‐performing the index by 0.54 per cent. In contrast, the annualised RAP measure highlighted the differences in the securitised property fund returns for a given level of risk, with a wide 12.90‐16.66 per cent range. To achieve this uniform level of risk, five securities property funds had to replace up to 21 per cent of their property portfolio with a risk‐free asset (90 day bank bills). The RAP measure also decomposes the excess returns above the benchmark. In this instance, the securitised property funds outperformance was from a mixture of active portfolio selection and simply taking on additional risk exposure.Originality/valueThe research demonstrated the benefits of analysing securitised property funds beyond the standard return and risk measures. The RAP approach provides a measure of return for a definite level of risk with the benchmark excess attributed to portfolio selection and additional risk. This performance information can provide valuable additional information for an astute investor.

Real estate fund active management

“…On the other hand, the funds that replicate the benchmark indices generate quite similar returns than the benchmarks before fees, but the after fees returns are lower than the benchmarks. The authors also find that tracking error by itself is unrelated to fund performance, which confirms the findings of Higgins and Ng (2009).…”

“…This makes sense, because Active Share is essentially within the control of the fund manager. However, as shown in equation 1, tracking error is influenced as much by the volatility of the market as it is by any anything the fund managers can do (see Higgins andNg, 2009 andHiggins, 2010). Therefore we feel justified in saying that the classification of the funds based on the dual sources of active management (Active Share and tracking error) is insensitive to the time period.…”

“…The approach of Alford et al (2003) has also been used to categorise both wholesale securitised property funds and unlisted wholesale property funds in Australia (Higgins andNg, 2009 andHiggins, 2010). A wholesale securitised property fund invests in Real Estate Investment Trusts (REITs) with the aim of replicating a particular property index.…”

“…The traditional way to measure the active management of a fund is to calculate its tracking error: as measured by the standard deviation of the difference in a fund's returns versus its benchmark returns (see inter alia, Alford et al, 2003, Higgins and Ng, 2009, and Higgins, 2010. However, tracking error alone is an inadequate measure of fund active management since even very actively managed funds can in fact have rather low tracking errors.…”

Time-varying correlation between stock market returns and real estate returns

“…To date, Australian real estate research has focused on describing the market (Higgins, 2007), modelling the determinants of real house prices (Abelson et al, 2005;Bodman and Crosby, 2003), surveying Australian fund manager attitude to real estate investment funds (Keng, 2004) and assessing the performance of Australian listed A-REITs (Higgins and Ng, 2009). We extend this literature by analysing the time-varying correlation that exists between returns on different classes of real estate investment and share price returns.…”