An Empirical Examination of the Performance of Real Estate Mutual Funds 1990-2008

AbstractEmpirical support for the evidence of over- or under-performance in real estate mutual funds is mixed. Using a sample covering the period 1990-2008, we provide a thorough investigation of the performance of real estate fund managers, including an examination of the impact of the down-market of 2007-2008. Our initial results show no over-performance for the overall period of 1990-2008; however, after accounting for the down-market period of 2007-2008, fund managers significantly out-perform the market for the 1990-2006 period. Thus, our results show that mutual fund investors can earn superior returns by investing in real estate mutual funds. Further, our cross-sectional results show that investors can earn higher returns by investing in funds that are large in size and rebalanced more frequently. © 2012 Academy of Financial Services. All rights reserved.JEL classification: G11; G12; G15Keywords: Mutual fund performance; Real estate mutual fund; Stock selection ability(ProQuest: . denotes formulae omitted.)1. IntroductionAccording to the Investment Company Institute, mutual funds in the United States managed roughly $11.1 trillion assets by the end of the year 2009, making them the largest mutual fund industry in the world. Moreover, the combined assets under management for the year 2009 increased by approximately $1.5 trillion or 15% over the previous year. Real Estate Mutual Funds (REMFs hereafter) were one of the largest drivers of this growth. According to the National Association for Real Estate Investment Trusts (NAREIT), the market capitalization of the REIT Equity Index in the year 2009 increased by roughly $72 billion or 41% over the previous year. In a recent study, Hartzeil, Muhlhofer, and Titman (2010) report that REMFs experienced an annual growth rate of 40% per year over the period 1994-2005. This explosive growth in actively managed REMFs shows that fund investors not only believe in this sector, they also believe that active management provides superior returns when compared with passively managed real estate ETFs or a diversified portfolio with a significant exposure to REITs. The tremendous growth of these funds over the last decade warrants an in-depth analysis of their performance. Our study uses a variety of models to analyze the performance of REMFs for the period 1990-2008.In a recent practitioner oriented study, Joseph Harvey, the President and CIO of Cohen and Steers1 reports that investment in funds that target REITs can deliver superior returns. His study indicates that REITs have out-performed diversified core funds by as much as 5.60% annually over the last 10 years.2 While the academic research on diversified mutual funds, in general, finds that such funds under-perform their relative benchmarks, empirical support on the evidence of over- or under-performance for real estate funds is mixed. Lin and Yung (2007) show that investors could benefit from selecting specific classes within REMFs. Their findings suggest that the growth category REMFs can deliver as much as 2.30% more return than value funds within REMFs universe and suggest the benefits of using active fund management for REMF investors. On the other hand, Derwall et al. (2009) show that momentum plays a major role in the over-performance of these funds. Their study suggests that REMF managers may be getting more credit than perhaps deserved because most of their returns can be mimicked by simply following cheap momentum strategies. The authors suggest that uninformed investors can earn higher returns (by saving on fees) by turning to indexation; that is, by investing in REIT ETFs.These conflicting results may be in part because of the small sample size and limited sample periods of previous articles. Our motivation, in this article, is to provide a detailed examination of REMF performance for the period 1990-2008. Our sample of REMFs is one of the largest to be used, and we use varied models, including conditional and unconditional models in our investigation of fund performance. …