Real Estate Mutual Funds: A Style Analysis
Lin, Crystal Yan, Yung, Kenneth, Financial Services Review
We find that the characteristics of real estate related securities are different from those of the general common equities. To help investors understand better the products offered by real estate mutual funds, we develop style descriptors that are specifically created for real estate related securities. Among the universe of real estate securities, we find real estate funds tilt toward large stocks and favor growth moderately over value. Growth managers outperform value mangers in this sector by 1.51% to 2.30% per year. However, there is evidence of shifts in the investment style among the funds. Our results help investors in evaluating real estate fund performance and making better asset allocation decisions. © 2007 Academy of Financial Services. All rights reserved.
Jel classifications: G11; G12
Keywords: Mutual fund performance; Style investment; Real estate mutual fund
Over $8.1 trillion are currently managed by the U.S. mutual fund industry.1 A significant portion of this amount is actively managed by professional investment managers who presumably rely on superior stock selection skills to outperform passive strategies. The bewildering variety of approaches followed by investment managers very often makes it difficult for investors to choose funds that are suitable. The institutional investment community has responded to the proliferation of investment methods by scrutinizing more closely an investment manager's investment style. The attention to investment style has several benefits. Among them, accounting for style helps performance evaluation by giving a clearer picture of a manager's stock selection skill. For example, the manager of a portfolio of large stocks may appear disappointed relative to a broad market index, but performance may be outstanding relative to a large stock benchmark. In addition, style-investing appeals to investors as it gives them a convenient framework with which to organize their investment strategies. Essentially, in style investing, investors group assets into different asset classes referred to as styles and move money into and out of these styles. According to Jeremy Siegel, style investing refers to "rotate between small and large and value and growth stocks' (Siegel, 1998).
In addition to the extensive studies on mutual fund performance, in recent years financial economists have also examined mutual fund investment styles. Brown and Goetzmann (1997) and Carhart (1997) find that size and value help explain the differences in fund performance. Chan, Chen and Lakonishok (2002) use the Fama-French factors as style indices and find mutual funds adopt investment styles that tend to cluster around a broad market benchmark, and the few funds that deviate from the index are more likely to favor growth stocks and past winners. Barberis and Shleifer (2003) show how funds' pursuit of styles can account for observed patterns in stock returns. On the profitability of style momentum strategies, Moskowitz and Grinblatt (1999) and Asness, Liew and Stevens (1997) successfully apply momentum strategies to industry portfolios and country portfolios, respectively. Lewellen (2002) reports that momentum strategies based on size and book-to-market portfolios are at least as profitable as individual stock momentum. Chen and De Bondt (2004) find evidence of style momentum within the S&P 500 index.
Extant studies on mutual funds have typically focused on general equity funds. To our knowledge, there are very few published articles on real estate mutual funds and none has examined specifically the issue of real estate mutual fund investment styles. O'Neal and Page (2000) study the performance of 28 real estate mutual funds over a three-year period from 1996 to 1998. Their results show that real estate mutual funds do not offer positive abnormal performance relative to several broader equity market indices. Lin and Yung (2004), using a larger sample and a longer sample period, report that real estate mutual fund performance is largely tied to that of the real estate industry. …