Active real estate managers outperform, study shows
Real estate funds are more likely to outperform and generate returns that are less volatile if their sector weightings deviate from the index, according to new research.
The study by Aberdeen Asset Management, advised by professors Martijn Cremers and Colin Lizieri, found that funds with the “highest segment active share” — or those with the highest proportion of assets allocated independently of the index — generated an alpha of 1.9% on average per year.
The research applied principles to the UK property sector that had previously only been used for equities, to see whether active managers generated outperformance.
Cremers, professor of finance at the Mendoza College of Business at the University of Notre Dame in the US, said: “Our study confirms that active management in property has benefitted investors.”
He said the average outperformance of 1.9% per year “was not accompanied by increased risk or less diversification”.
The research carried out by Cremers and Lizieri, professor of real estate finance at Cambridge University in the UK, looked at 256 funds in IPD’s UK database over the 10 years to the end of 2011.
The research compared property holdings by aggregating fund weights by segment and geography in order to compare them to a benchmark. This enabled the researchers to see whether a fund had a higher or lower share of assets managed actively.
It then used this adapted active-share measure for property at the segment level in the UK and tested whether higher active-share managers tended to outperform lower active-share managers.
Funds in the highest active-share group had 31 properties on average — the lowest number of holdings among all groups — and had an average size of around £200m (€239m).
Russell Chaplin, CIO for property at Aberdeen Asset Management, noted that such funds could have been forced to be active because they were too small to enter markets such as prime Central London offices or large shopping centres.
He said managers of these types of property portfolios could not track an index and so had to take a bottom-up approach to stock selection to deliver long-term value. “This research is a vindication of that approach and extends principles which have a firm basis in the equity markets to the property sector,” he said.
Chaplin added: “This research shows you don’t need to be that big to be able to outperform.”
The research also shows that benchmarks are there for measurement purposes and not as construction tools, according to Chaplin.
He said it was always tempting for managers to monitor how they were performing relative to an index even if they were not tracking it, which could lead them to change allocations.
“This shows you shouldn’t worry about those positions benchmark-related,” he said.
“Each manager needs to have the courage of their convictions in the assets they’re selecting and stick with those assets.”