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

Abstract

This paper examines the performance of active US domestic real estate mutual funds (REMFs), both before and after fund managers' compensation. We consider both the REMF industry as a whole, and also individual funds, separately against stock market and real estate market benchmarks. For individual funds, the cross-section bootstrap method is used to separate fund managers' genuine skills from luck. We find that the REMF industry, as a whole, can beat a real estate market benchmark; but we find that the REMF industry cannot beat the stock market or the combined benchmark even when operating expenses are not taken into account. For individual REMFs, we find genuine stock-picking skills, net of operating expenses, for nearly 30% of funds in the performance distribution, relative to the real estate sector benchmark, but no outperformance against the stock market. The proportion of skilled managers shrinks to no more than 10% when the combined benchmark is used.