Performance and Market Maturity in Mutual Funds: Is Real Estate Different?

Abstract

Despite the lack of convincing evidence that active investment fund managers add value, the number of actively-managed US mutual funds has increased substantially over the last 25 years. While non-sector diversified mutual funds have received much attention, sector funds, except real estate mutual funds (REMFs), have not. In this paper, we provide new and more robust evidence on the performance of active REMFs compared to all actively managed mutual funds. We use the Carhart four-factor model with an additional liquidity factor as a risk-adjusted benchmark. We use wild bootstrap methods to deal with small samples, non-normality and heteroscedasticity, and we control for the false discovery of significant results. For portfolios of fund types, we find evidence of both significant outperformance and underperformance, net of fees, during 1992-2016. We consider non-overlapping five-year and three-year periods and find very limited evidence of persistent outperformance. For individual funds, we find that, for both sector and diversified funds, net of fees, only 0.79% are skilled. We find persistence in skills for only two individual fund managers of diversified funds. We investigate the effects of the outsourcing of management and of team versus individual management. Outsourcing has no effect on performance of non-RE sector funds but, for cap-based funds and style-based funds, it has a negative effect. There is some evidence that this may also be true for REMFs. Team management has no effect for any types of funds. Overall, we conclude that REMFs are generally no different from other sector funds.

Evaluating the Performance of Real Estate Exchange-Traded Funds

“…Moreover, recent investigations by Lantushenko and Nelling (2020) observed a decline in activity among real estate fund managers, with geographically diversified real estate mutual funds failing to outperform. MacGregor et al (2021) did not find substantial evidence supporting the outperformance of global real estate mutual funds compared to other actively managed funds, even in the long term. Despite the exponential growth of real estate mutual funds highlighted by Malhotra's study (Malhotra 2020) due to low interest rates and increased real estate demand, the average turnover ratio for real estate mutual funds decreased significantly after 2009, indicating reduced portfolio management activity.…”

Do the Managers of Global Real Estate Mutual Funds Have Skills?

“…This is explained by information asymmetry, which means that these managers know their sectors better than other types of fund managers (Kaushik et al, 2010). In contrast, studies which have considered sector funds (Dellva et al, 2001;Tiwari and Vijh, 2001;Eakins and Stansell, 2007;Kaushik et al, 2010;MacGregor et al, 2020) have found that some sectors, such as technology, health care and utilities, can outperform but only during specific periods. And Khorana and Nelling (1997) suggested that the overall risk levels of sector funds are indistinguishable from small-cap or aggressive-growth funds.…”

“…Earlier studies by Kallberg et al (2000) and Gallo et al (2000) found outperformance when real estate market returns were poor, which is attributed to real estate market inefficiency. However, more recent studies (O'Neal and Page, 2000;Lin and Yung, 2004;Rodriguez, 2007;Chiang et al, 2008;Chou and Hardin, 2014;MacGregor et al, 2020) have found little or no evidence to support significant outperformance attributable to real estate mutual fund (REMF) managers' superior skills, regardless of the benchmarks used for the market or the real estate sector. Ferreira et al (2013) considered active mutual funds in 27 countries and used country-specific Carhart benchmarks.…”

Market context matters: the impact of corporate diversification on REIT performance in Malaysia and Singapore

“…The S-REIT market, characterized by its developed and mature nature, boasts a greater number of publicly traded REITs and a larger market capitalization compared to the M-REIT market. This difference in market maturity not only influences diversification strategies but also sets distinct investor expectations, impacting the performance and strategic planning (MacGregor et al ., 2021) of REITs in each market. In Malaysia, where the financial market is less sophisticated, diversification within the REIT sector has been shown to add significant value.…”