We examine the performance of real estate mutual funds during January 1991–December 1997. As a group, the sampled funds outperformed the Wilshire Real Estate Securities Index on a risk‐adjusted basis by more than 5 percentage points annually. We attempt to explain these surprising findings by examining the fund's asset allocations across stocks, bonds and real estate property types using Sharpe's (1992) effective‐mix test. We find that all of the superior performance is attributable to fund managers' decisions to overweight outperforming property types (apartments and health care) relative to the Wilshire Real Estate Securities Index weights. Performance of the funds matches a multiple‐property‐type benchmark that takes account of the fund's exposure to each property type. Therefore, real estate funds demonstrated superior allocation across property types, but neither superior nor inferior selection within property type, during 1991–1997. Our findings emphasize the importance of asset allocation for real estate mutual‐fund performance.
We examine factors underlying the differences in commingled real estate fund (CREF) performance using a sample of 65 CREFs during 1985CREFs during -2002. More than half of the individual CREFs underperformed the employed benchmark. However, portfolios of CREFs performed well in both up and down markets, smaller CREFs outperformed larger CREFs, and top performing CREFs continued to outperform. Differential CREF performance appears to be attributable to property selection, rather than allocation across real estate sectors. Liquidityconstrained CREFs exhibited lower risk. CREFs with large benchmark tracking error experienced inferior performance. These findings indicate important cross-sectional differences among CREFs and diversification opportunities for pensions employing multiple CREF investment strategies.Real estate represents an important component of pension fund assets. 1 A substantial amount of institutionally managed pension real estate assets are invested via commingled real estate funds (CREFs). However, surprisingly little is known about the factors underlying the differences in CREF performance. Early research focuses on CREF diversification potential and performance. 2 For example, Brueggeman, Chen and Thibodeau (1984) examine the diversification benefits from adding two CREFs to a portfolio of stocks and bonds. Hartzell, Hekman and Miles (1986) use data for a single institutionally managed real estate fund to examine diversification within the real estate sector.
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