Country specialist funds outperform
Economics says that specialisation leads to greater efficiency and effectiveness for a firm or enterprise. For real estate funds in particular, those that specialise in single markets should have a better chance of picking bargains when buying assets, and their specialist knowledge should also give them operational advantages, including a better understanding of tenant requirements, as well as management efficiencies and reduced costs.
But do these theoretical advantages feed through to European specialist funds’ performance relative to generalist funds? For one thing, diversified vehicles are likely to be more flexible and should be able – in theory at least – to avoid weaker markets. They should also be able to use the insights that come from being diversified, including the ability to compare and contrast trends across a broader range of markets.
The paper ‘Do Specialist Funds Outperform? Evidence from European Non-Listed Real Estate Funds’ concluded that specialist funds do indeed outperform – but only sometimes. Authors Franz Fuerst, Nick Mansley and Zilong Wang found that the evidence for specialist funds in Europe outperforming was strongest for those that specialise on a country basis, but conversely that there was little evidence of outperformance among sector specialist funds.
The paper ‘Do Specialist Funds Outperform? Evidence from European Non-Listed Real Estate Funds’ concluded that specialist funds do indeed outperform
The work, which won the 2021 Nick Tyrell Prize for real estate research in Europe (awarded jointly by INREV, IPF and SPR) did not just have ground-breaking conclusions, but was also unique in terms of the length of period covered (2001-19) and the number of data points analysed (4272 performance observations across 592 funds). In addition, it was the first time that INREV fund return data had been used in such a broad study of specialisation versus diversification.
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Describing the results of the research at a webinar on 9 December 2021, Nick Mansley stressed that although there was strong evidence of outperformance for country specialists over the full 20 years of analysis, this was mainly due to higher returns in the long recovery period between 2010 and 2019. Indeed, there was evidence that during the financial crisis (2007-9), country specialist funds were more vulnerable to weak returns than those diversified by country.
Mansley expressed some surprise that there had been no suggestion of outperformance by sector specialist funds in the research. However, part of the reason for this could be that the analysis was based on the main real estate investment sectors (office, retail, industrial/logistics and residential). It is possible that specialisation is more beneficial in alternative sectors, such as healthcare, data centers and self-storage, where there can be greater operational risks and therefore a greater need for sector-specific expertise.
For investors, a key implication of this study is that a strategy employing a number of country or country/sector specialist funds is likely to outperform one that just uses generalist funds, based on the historical evidence. But it was noted during the panel discussion at the webinar that INREV data also shows a wide range of individual fund performance during any period. This means that choosing the right individual fund and/or manager is likely to be even more important than choosing between specialist and generalist funds.
For investors, a key implication of this study is that a strategy employing a number of country or country/sector specialist funds is likely to outperform one that just uses generalist funds, based on the historical evidence.
Download the Nick Tyrrell 2021 prize winning paper