Further Evidence on the Performance of Funds of Funds: The Case of Real Estate Mutual Funds

Abstract

The authors thank Kenneth French for providing the three-factor return series.

Value Added from Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate

“…Similarly, Kallberg, Liu, and Trzcinka (2000) find that REIT mutual funds during the 1986-1998 period obtained significant abnormal net returns. On the other hand, Chiang, Kozhevnikov, Lee, and Wisen (2008) show that REIT mutual funds perform no better than a strategy of randomly investing in REITs, and Hartzell, Mühlhofer, and Titman (2010) find that a value-weighted portfolio of all REIT mutual funds delivers alpha close to zero and fails to outperform any alternative benchmarks net of fees. Funds investing in hedge funds deliver small alphas, albeit sporadically, (Fung, Hsieh, Naik, and Ramadorai (2008)), but there is no significant underperformance among hedge funds-of-funds either.…”

Can US Real Estate Mutual Funds Beat the Market? New Evidence

“…In contrast to the findings of outperformance by Kallberg et al (2000) and Gallo et al (2000), more recent studies (such as O'Neal and Page, 2000; Lin and Yung, 2004;Rodriguez, 2007;Chiang et al, 2008) Most of the earlier studies examine performance using only the net returns of funds (Kallberg et al, 2000;Gallo et al, 2000;O'Neal and Page, 2000;Lin and Yung, 2004;Rodriguez, 2007;Chiang et al, 2008), and overlook the interaction between fund's expense costs and performance. Unlike the other REMF studies, Hartzell et al (2010) examine funds' returns before and net of costs and find evidence of outperformance with respect to an index benchmarks derived from NAREIT and Wilshire.…”

“…One final issue is survivor bias. The findings on outperformance in the literature are subject to the in-built survivor bias of the data sources, such as Morningstar (Kallberg et al, 2000;Gallo et al, 2000;O'Neal and Page, 2000;Rodriguez, 2007;Chiang et al, 2008) and Yahoo Finance Lin and Yung (2004), which causes overestimation of outperformance.…”

“…Specifically, by applying simple passive index benchmarks, earlier researchers tend to find evidence for outperformance (Kallberg et al, 2000;Gallo et al, 2000), although later studies show no sign of significant outperformance when both a passive market index benchmark and passive portfolio benchmark from a risk factor model are used (Lin and Yung, 2004;Chiang et al, 2008). Kallberg et al (2000) find strong and robust evidence for outperformance on 44 REMFs from 1986 to 1998, irrespective of various benchmark applications -CAPM, Fama-French three factor models, or passive real estate market index proxied by Wilshire Real Estate Index and NAREIT Index.…”

“…Such specialized sector equity funds are exposed to real estate sector risk. Many studies employ the US passive stock index or real estate sector index as the benchmark for fund's returns, net of operating expenses, to measure REMF performance (Kallberg et al, 2000;Gallo et al, 2000;O'Neal and Page, 2000;Lin and Yung, 2004;Rodriguez, 2007;Chiang et al, 2008). The use of a real estate market index as the benchmark is justified by the excess sector risk exposure of REMF portfolios holdings towards the real estate industry, compared with other well diversified funds.…”