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Performance Chasing, Fund Flows and Fund Size in Real Estate Mutual Funds

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Abstract

Real estate mutual funds have grown dramatically in number, size, scope and assets under management over the last 15 years, but little assessment is evident. The present study addresses this limitation. Better prior period performance is associated with greater shares of fund inflows for a period. Returns, however, are negatively associated with increased fund flows and fund size. Investors chase past performance limiting fund managers’ ability to optimize investments. Under normal market conditions, but departing from typical mutual fund performance, real estate mutual fund returns generally exceed relevant benchmarks on a before expenses basis and match benchmark returns after expenses. The ability to meet and exceed benchmark returns, however, does not hold during the financial crisis period. Overall, more established funds are shown to have higher returns while fund turnover is not a determinant of returns.

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Notes

  1. In a related topic, Bond and Mitchell (2010) look at the performance of managers in the UK making direct real estate investments (property portfolios) and find no excess returns. O’Neal and Page (2000) and Gallo et al. (2000) provide earlier studies with small samples of exclusively REIT mutual funds with mixed results. In the present research, we explicitly address the fact that real estate mutual funds presently invest in more than just REITs.

  2. The NBER defines the financial crisis period as December 2007 to June 2009.

  3. The specific statement of interest follows. “Transfers into TIAA Real Estate Account will be limited if your Real Estate Account balance—across all contracts, if you have more than one contract—would exceed $150,000 as a result of the transfer. By limiting transfers to the Real Estate Account, we expect the amount going into and out of the Account will be more predictable and will enhance our ability to invest and manage the Real Estate Account’s portfolio with a long-term perspective. This is consistent with the Account’s strategy and we also believe it’s in the best interest of TIAA-CREF participants”. The notice was sent by TIAA-CREF to their real estate mutual fund investors on September 15, 2010 and the endorsement took effect on March 31, 2011. The argument can be applied to funds making direct investments and investing in securitized real estate claims.

  4. The application of the theory can be to any commingled asset fund and is not restricted to mutual funds.

  5. Ling and Naranjo (2006) show a positive relation between REIT market returns (at the industry level) and subsequent real estate mutual fund flows. This study investigates the relation between individual mutual fund performance and fund flows in the real estate mutual fund industry. We provide evidence to show that fund flows are positively associated with fund past performance and the best performing funds receive the greatest new money.

  6. This methodology is also used in Hartzell et al. (2010).

  7. We also use the FTSE NAREIT index as the market return. The results are similar.

  8. This method has been used in Chen et al. (2004) and Hartzell et al. (2010).

  9. Equity funds usually charged 1.38 % of TNA in 1994 and 1.43 % of TNA in 2006 as expenses from the CRSP mutual fund database.

  10. Results are still consistent when using raw returns to do the analyses.

  11. Our results are robust to Model 1, the one-factor model, and Model 3, the eight-factor model. This Table is available upon request.

  12. The median of fund flows for the non-crisis time from 1994 to 2010 is 0.11 % and for period of 1994–2007 is 0.22 %.

  13. According to the 2012 Investment Company Fact Book, equity mutual funds received $74,151 million in 2007, but experienced net cash outflows of $228,498 million and $138 million in 2008 and 2009, respectively. Bond funds received $108,327 million, $29,542 million and $380,433 million in 2007, 2008 and 2009, respectively (Investment Company Institute 2012).

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Correspondence to William G. Hardin III.

Appendix

Appendix

In this Appendix tests from Tables 2, 3, 4, 5, 7 and 8 are repeated with the sample period from 1994 to 2010 to investigate the impact of the financial crisis on the initial findings. In each table, we first show results using the longer sample period without the crisis time to confirm that our results still hold. Subsequently, we show results using all months and add interaction terms between key variables and the crisis period to the regressions. The financial crisis period is from the NBER and is from December 2007 to June 2009. To conserve results using CRSP Ziman REIT index as the market return are reported.

Table 9 Fund flow to performance sensitivities with sample period of 1994–2010
Table 10 The estimated piecewise linear relation between future fund flows and past performance ranking with sample period of 1994–2010
Table 11 The impact of fund size and fund flow on real estate mutual fund performance with sample period of 1994–2010
Table 12 The effect of fund flow and turnover ratio on fund performance conditional to fund size
Table 13 Holding and fund performance of real estate mutual funds with sample period of 1994–2010

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Chou, WH., Hardin, W.G. Performance Chasing, Fund Flows and Fund Size in Real Estate Mutual Funds. J Real Estate Finan Econ 49, 379–412 (2014). https://doi.org/10.1007/s11146-013-9444-x

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