Classic asset pricing is problematic as a method to assess privately held asset investment performance. We propose an alternative approach that involves adjusting the characteristics of assets constituting an index or portfolio to match the asset characteristics of a reference index or portfolio. This approach is applied to commercial real estate, where we create an index of REIT returns to compare to the NCREIF index. To enhance comparability, return indices are adjusted for partial-year financial data, leverage, asset mix and fees. Adjusted results over a 1980-1998 sample period show general convergence between the indices, although an annual return difference of over three percentage points remains in favor of public market asset ownership. Possible causes of the investment performance gap include liquidity and geography as missing risk factor adjustments, an unrepresentative sample period, and the form in which commercial real estate assets are held.Analysts often use asset pricing models to measure investment performance and to compare individual stocks or portfolios of exchange-traded securities. The classic single-factor capital asset pricing model (CAPM) is an example. In this model an estimated beta characterizes priced risk and determines predicted investment performance. Performance assessment occurs by comparing actual returns to predicted returns. Asset pricing models are also useful to compare investment characteristics and performance across financial assets. For instance, performance is often compared to a risk-adjusted reference portfolio or index to assess whether a fund manager was lucky or good when excess investment returns are realized.Comparative performance assessment using a classic asset pricing approach can be inappropriate in a private market setting, however. Consider the case of commercial real estate. Privately held commercial real estate assets are often nontraded for extended periods and are sufficiently unique as to make value estimation difficult. A further complicating factor in comparing returns is the
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.