European Real Estate Society

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European Real Estate Society Annual
Conference Vienna 2013 Real Estate Fund Active
Management  by Stephen Lee  Cass Business School,
City University London and Giacomo Morri  SDA
Bocconi School of Management
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Introduction

• Active Management
• Uses manager expertise
• Different investments from benchmark
• Expensive
• Lacks diversification
• Incurs incidental risk and intentional risk.
• Problem closet index funds
• Passive Management
• Replicates index
• Should be inexpensive
• Diversified
• Should only incur incidental risk but this is
  difficult to do, especially in real estate market
• .

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Two Dimensions of Active Management

• Traditional method Alford et al (2003)
• tracking error
• New method Cremers and Petajisto (2009)
• Active Share
• Complete picture
• tracking error and
• Active Share

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Two Dimensions of Active Management
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Research Design

• Closely follows that of Cremers and Petajisto
  (2009)
• One benchmark portfolio
• Property data alone
• Hybrid measure of Active Share
• Tracking error
• Nine-year average Active Share
• Compare returns

 
 
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Fund Data

• 38 UK real estate funds with complete return and
  market segment data all active funds
• Period from Q42003 to Q42011
• 18 Specialist and 20 Balanced
• Balanced expected to be index funds
• Specialist funds expected to be diversified
  stock pickers or concentrated stock pickers.

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Fund Classification
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Fund Classification
Table 1 Rank Correlation between Tracking Error
and Active Share across Sub-periods
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Returns V Active Management
Table 2 Return, Active Share, Tracking error,
Size and Leverage Overall period
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Returns V Active Management
Table 3 Return, Active Share, Tracking error,
Size and Leverage Sub-periods
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Table 4 Correlation Return, Active Share,
Tracking error, Size and Leverage
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Conclusions

• First, the approach is able to classify real
  estate funds in the UK on their management
  activity into categories that makes intuitive
  sense and seem stable over time.
• Second, Balanced funds show relatively low
  Active Shares and particularly low tracking
  errors, due to the benefits of property-type
  diversification.
• Specialists funds display higher Active Shares
  and both high and low tracking errors depending
  on their stock picking approach diversified or
  concentrated.
• In other words, the fund classification scheme
  of IPD does a respectable job in identify the
  fund types (Balanced and Specialist).

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Conclusions

• Next, the performance of the different
  management strategies varies with diverse market
  conditions.
• Active funds that use a lot of leverage and
  demonstrate stock-picking ability can add value,
  especially in boom periods, whereas index funds
  which use little or no leverage show consistent
  but low returns all the time.
• This implies that investors need to constantly
  monitor changes in the market and switch between
  fund management styles, if at all possible.

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European Real Estate Society Annual
Conference Vienna 2013 Real Estate Fund Active
Management Any Questions?