The performance of the Real Estate Mutual Fund industry: an empirical examination from 2003 to 2015

Abstract

Thanks to the real estate industry’s strong growth since the early 2000s, financial investors have shown increased interest in it. This has paved the way for the quick development of specialized investment vehicles and especially Real Estate Mutual Funds. This is precisely what led to the writing of this paper. As a first step, it aims at describing the economic environment that surrounds this specific industry between 2003 and 2015. It provides information and details about the main drivers of the expansion of the US housing bubble. It further illustrates the disastrous consequences of the bubble’s rupture on the global economy and the way financial markets recovered over the next years. In a second step, it analyses the past performances of global REMF during the pre-crisis (i.e. 2003-2006), crisis (i.e. 2007-2009) and post-crisis (2010-2015) periods. While REMF market showed strong signs of inefficiencies throughout the 1990s, the paper demonstrated standardization in the industry, as the results were fairly similar to those obtained by the broad mutual fund industry. In fact, managers were no longer able to consistently outperform the real estate benchmark over the period. Following that, the paper used regression models to highlight the factors (i.e. total expense ratio, turnover ratio) impacting the REMF alphas. It found that REMF with the lowest TER and turnover ratio tend to produce better performances. However, the relatively low r-squared suggested that no general conclusions could be drawn from this analysis, Finally, it provides a cursory analysis of the existing relationship between the stock market and the real estate mutual fund industry at the global level. With the exception of the 2000-2006 period, which featured contrasting trends in the economy (i.e. the quick expansion of the housing bubble and the recovery of the stock market), it found a strong correlation between them. This in turn suggested the low diversification benefits from the real estate industry, when added to a world stock portfolio.