Assessing the 'Santa Claus' Approach to Asset Allocation: Implications for Commercial Real Estate Investment

Posted: 25 Jun 1998

See all articles by Jianping Mei

Jianping Mei

New York University (NYU) - Department of Finance

Date Written: December 20, 1995

Abstract

Casual observation suggests that there is wide industry practice of a "Santa Claus" approach to fund allocation, i.e., giving more money to fund managers whose performance have been "nice" (good) in the recent past and giving less money to fund managers if their performance has been "naughty" (poor). Using the market timing test of Henriksson and Merton (1981), we show that this backward-looking "Santa Claus" approach to asset allocation is not consistent with optimal portfolio management and that this "Santa Claus" strategy may have contributed to the poor performance of financial institutions' real estate portfolios. We also discuss the role of loan-to-value ratio analysis, and point out how this standard bank loan underwriting procedure may have affected commercial banks' "Santa Claus" strategy. We propose that the backward- looking "Santa Claus" strategy should be replaced by either a simple Buy-and-hold strategy or a contrarian investment strategy of increasing real estate exposure after a market downturn and reducing real estate exposure after a real estate market rally.

JEL Classification: G12, G23

Suggested Citation

Mei, Jianping, Assessing the 'Santa Claus' Approach to Asset Allocation: Implications for Commercial Real Estate Investment (December 20, 1995). Available at SSRN: https://ssrn.com/abstract=9069

Jianping Mei (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

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