Alternative Benchmarks for Evaluating REIT Mutual Fund Performance

40 Pages Posted: 1 Nov 2007 Last revised: 7 Oct 2008

See all articles by Jay C. Hartzell

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Tobias Muhlhofer

University of Miami - Department of Finance

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 6, 2008

Abstract

While Real Estate Investment Trusts (REITs) have experienced very high growth rates over the past 15 years, the growth in mutual funds that invest in REITs has been even more dramatic. REIT mutual fund returns are typically presented relative to the return on a simple value-weighted REIT index. We ask whether including additional factors when benchmarking funds' returns can improve the explanatory power of the models and offer more precise estimates of alpha. We investigate three sets of REIT-based benchmarks, plus an index of returns derived from non-REIT real estate firms, namely homebuilders, and real estate operating companies. The REIT-based factors are a set of characteristic factors, a set of property-type factors, and a set of statistical factors. Using traditional single index benchmarks, we find that about six percent of the REIT funds exhibit significant positive performance using traditional significance levels, which is more than twice what random chance would predict. However, with the multiple index benchmarks that we prefer, this falls considerably, to only 0.7 percent. In addition, we find that these sets of factors and the non-REIT indices better explain the month-to-month returns of the REIT mutual funds. This suggests that investors or researchers evaluating REIT mutual fund performance may benefit from a multiple benchmark approach.

Keywords: REITs, Mutual Funds, Performance Evaluation

JEL Classification: G11, G12, G23

Suggested Citation

Hartzell, Jay C. and Muhlhofer, Tobias and Titman, Sheridan, Alternative Benchmarks for Evaluating REIT Mutual Fund Performance (October 6, 2008). Available at SSRN: https://ssrn.com/abstract=1025478 or http://dx.doi.org/10.2139/ssrn.1025478

Jay C. Hartzell (Contact Author)

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Tobias Muhlhofer

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://tobias.muhlhofer.com

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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