Can Fund Managers Select Outperforming REITS? Examining Fund Holdings and Trades

Despite six empirical studies published since 2000 designed to assess fund managers' REIT selection ability, their skill remains in question. Unlike previous studies, we examine fund holdings and trades of REITs to answer this question. This allows us to account for portfolio rebalancing that alters REIT-characteristic weights of fund portfolios. All REITs held by funds at each report date are matched to benchmark portfolios of REITs that share similar characteristics. Results show that real estate mutual fund managers, after controlling for size, property type shifting, and momentum, generated significant positive alpha with their securities selection ability as predicted by Grossman and Stiglitz (1980). To understand the sources of such ability, we examine whether fund managers that follow certain trading strategies outperform relative to other managers. The potential investment strategies we examine are related to geographic concentration, public and private real estate valuation, income and appreciation styles, and leverage of the underlying REITs. Exploring these investment strategies, we find that fund managers that focus on geographically concentrated REITs generate higher returns to investors, especially in the later years, consistent with the findings of Capozza and Seguin (1999)