Do real estate mutual funds enhance portfolio returns and reduce portfolio risk?

Abstract

This study examines both the determinants of risk-adjusted returns of real estate mutual funds relative to that of five categories of equity mutual funds and the systematic risk/return impacts on mutual fund portfolios when combined with real estate mutual funds. We find that there are three variables that are significant in affecting risk-adjusted returns of real estate mutual funds: correlation with stock market returns, expense ratio and tax efficiency. Real estate funds with returns that have a greater association with stock market returns would have larger risk-adjusted returns. Low tax efficiency and larger expense ratios would lead to reduced risk-adjusted returns. This study provides evidence of the positive risk/ return impacts of including real estate mutual funds in a portfolio of equity mutual funds. Combining real estate mutual funds into equally weighted portfolios with non-real estate mutual funds would have increased portfolio returns while decreasing portfolio beta.

The performance of Italian real estate mutual funds

“…This literature generally concludes that individual real estate returns and real estate funds are persistent (see Devaney et al, 2007 for a review). The third area of research examines the characteristics of real estate investment trusts (REITs), real estate operating companies (REOCs) and real estate mutual funds (REMFs) which have power in explaining performance (Howe and Shilling, 1990;Redman and Manakyan, 1995;Allen et al, 2000;O'Neal and Page, 2000;Gallo et al, 2000;Kalberg et al, 2000;Lin and Yung, 2004;Mooradian and Yang, 2001;Delcoure and Dickinson, 2004;Ooi and Liow, 2004;Gullett and Redman, 2005;Philpot and Peterson, 2006). However, these studies are almost all based on US data with no study examining the characteristics of Italian real estate mutual funds (IREMFs) that influence returns.…”

Liquidity Pricing in Unlisted Real Estate Funds

“…They also find that, after adjusting for other risks, actively managed REMFs have abnormal return higher than passive funds, proving that these types of instrument are to be preferred. A similar result is included in Gullet and Redman (2005) who analyse the Sharpe ratio of several types of funds. They analyze REMFs and their interaction with the stock market, finding a positive effect of correlation between fund returns and equity market on the fund performance.…”

“…In time of poor equity returns, REMFs experience a high inflow of capital. Other investors, in accordance with Gullet and Redman (2005), use these funds to reduce the risk of a wider portfolio, or as a low risk exposure to the real estate market. Among these variables, we classify stock market returns and growth in gross domestic product.…”

“…A big size of a fund reduces the risk for two directly consequences. First, a large size allows economies of scale and achieves a lower management expenses and trading costs (Gullet andRedman 2005, O'Neal andPage 2000). Secondly, have been demonstrated that big buildings, which usually belong to larger mutual funds, have been best-performing in 90s and early 00s (Baum 2001).…”

Open-ended property funds: Risk and return profile — Diversification benefits and liquidity risks

“…30 This result remains valid when we use the August 1999-December 2008 period to construct the benchmark portfolios, and when we use the February 1991-July 1999 period to construct time series of future returns. 31 See Maurer et al (2004) and Gullett and Redman (2005) for more extensive discussions. 32 See Sebastian and Tyrell (2006) It is obvious, when we compare the events of both periods, that the temporary suspension during the 2008-2010 global financial crisis was more significant for the OPF market.…”