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Real estate fund active management

Stephen Lee (Cass Business School, City University London, London, UK)
Giacomo Morri (SDA Bocconi School of Management, Bocconi University, Milan, Italy)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 7 September 2015

1317

Abstract

Purpose

The purpose of this paper is to analyse the performance of UK property funds using the dual sources of active management, Active Share and tracking error, to distinguish between the types of active management styles used by funds.

Design/methodology/approach

The authors use data on 38 UK real estate funds and classify them into five active management categories using the dual sources of active management, Active Share and tracking error. Then, the authors compare their return performance against Active Share, tracking error, fund size and leverage. Therefore the paper is able to answer two of the fundamental questions of investment: does active management add value and what form of active management, stock selection or factor risk, is better at adding value to the fund?

Findings

There are three main conclusions. First, the approach of Cremers and Petajisto (2009) and Petajisto (2010) 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. In contrast, specialists funds display higher Active Shares and both low and high tracking errors depending on their stock-picking approach; diversified or concentrated. Third, an analysis over different time periods confirmed that funds in the sample essentially remained in the same categories within the sample period, even during markedly different market return periods. This implies that investors need to constantly monitor changes in the market and switch between fund management styles, if at all possible.

Research limitations/implications

The analysis was only based on 38 funds with complete data over the sample period and the relationship between fees and active management was not examined, even though ultimately investors are concerned with returns after management fee. It would be instructive therefore if the number of funds and time period was expanded to see if the results are robust and to see whether management fees outweigh the benefits of active manager.

Practical implications

The findings should enable investors to make a more informed investment decisions in the future.

Originality/value

To the best of the author’s knowledge this is the first paper to apply the dual sources of active management, Active Share and tracking error, in the UK real estate market.

Keywords

Citation

Lee, S. and Morri, G. (2015), "Real estate fund active management", Journal of Property Investment & Finance, Vol. 33 No. 6, pp. 494-516. https://doi.org/10.1108/JPIF-06-2014-0043

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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