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Specialization and Institutional Investors’ Performance – Evidence from Publicly Traded Real Estate

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Abstract

We examine the extent to which 50,620 global institutional investors’ specialization in publicly traded real estate securities is related to their investment performance. Consistent with the information advantage theory (Merton Journal of Finance 42, 483–510, 1987; Van Nieuwerburgh and Veldkamp Journal of Finance, 64, 1187–1215, 2009), we show a positive relation between the percentage of the institution’s portfolio invested in real estate securities and the return generated on those securities. Moreover, we present evidence that the institution’s level of active share to real estate securities is positively related to performance. Additionally, we find that the benefits related to specialization are more pronounced for investors specializing in a narrow set of securities that requires a unique set of skills to analyze.

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Notes

  1. When we discuss real estate securities, we are referring to operating firms that are dependent on the real estate sectors. Table Error! Reference source not found. shows the Standard Industrial Classification (SCI) codes of the firms we classify as “real estate securities.” REITs belong to SIC 6798.

  2. The assertion that REITs require unique expertise is supported by Cici et al. (2011). The authors find that some mutual fund managers can better process REIT-specific information that leads to profitable investment decisions. The authors conclude that outperformance in REITs derives from “endemic abilities” of the managers to process information.

  3. Papers that examine institutional investors in real estate include: Ciochetti, Craft, and Shilling (2002)‘s study of institutional investors’ liquidity concerns; Lantushenko and Nelling’s (2016) and Freybote and Seagraves’ (2017) studies on institutions’ herding behavior in real estate; Devos, Ong, Speiler, and Tsang’s (2013) and Das, Freybote, and Marcato’s (2014) studies on institutional investor behavior, before, during, and after the financial crisis; An, Wu, and Wu’s (2016) study on the relation between institutional ownership and REIT crash risk.

  4. For institutions with multiple portfolios, FactSet provides holdings information for each portfolio. We treat each portfolio as an individual observation throughout the analyses.

  5. We exclude banks and insurance investors from the sample due to their small sample size. We also exclude index funds because they, by definition, do not attempt to outperform the passive index.

  6. We note that a firm must hold at least ten real estate or REIT securities to be included in our active share analysis.

  7. We obtain the systematic risk factors from Kenneth French’s data library. The data have been used previously in global performance studies (e.g., Fama and French 2012).

  8. We observe qualitatively similar results if we include banks and insurance companies in our sample.

  9. The list of tax-havens includes Hong Kong, Andorra, the Bahamas, Bermuda, the Cayman Islands, Cyprus, Gibraltar, Iceland, Monaco, and Malta.

  10. This 3.04% annual Alpha is based on the Alphas reported in specification 2 and 5. Specifically, 0.0304 = 4 * (0.0019 – (−0.0057)).

  11. The −2.2% annual return is calculated as follows: 4 x (0.1 x (−0.0538)) = −0.02152.

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Author information

Authors and Affiliations

  1. Florida International University, Miami, FL, USA

    Eli Beracha

  2. Marquette University, Milwaukee, WI, USA

    George D. Cashman

  3. Colorado State University, Boulder, CO, USA

    Hilla Skiba

Authors
  1. Eli Beracha
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  2. George D. Cashman
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  3. Hilla Skiba
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Correspondence to Eli Beracha.

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Appendix

Appendix

Sample description by investor’s domicile

The Appendix shows the sample averages for portfolio weights of real estate securities and REITs by institutions’ domiciles. The first column shows the number of investors from each domicile during the sample period and the last two columns show the average portfolio weights in real estate related securities and REITs. The table includes all investors with at least some portfolio weight in either real estate securities or REITs.

 

Number of investors

Portfolio weight

 

Number of investors

Portfolio weight

Domicile

RE

REIT

RE

REIT

Domicile

RE

REIT

RE

REIT

AND

2

 

0.0617

 

KEN

1

 

0.0615

 

ARE

26

1

0.3157

0.0175

KOR

89

8

0.0386

0.0153

ARG

6

1

0.0823

0.0095

KWT

7

 

0.2104

 

AUS

596

254

0.1848

0.1845

LBN

1

 

0.2150

 

AUT

461

192

0.0990

0.0600

LIE

123

45

0.1015

0.0681

BEL

520

344

0.0561

0.0470

LKA

3

 

0.2525

 

BGR

2

1

0.0472

0.1513

LTU

11

3

0.1248

0.0599

BHR

5

 

0.0834

 

LUX

644

303

0.0578

0.0485

BHS

25

10

0.0348

0.0118

LVA

6

1

0.0517

0.0107

BMU

17

6

0.0582

0.0188

MCO

1

1

0.0590

0.1751

BOL

1

 

0.0489

 

MEX

110

18

0.1174

0.1994

BRA

912

12

0.1397

0.0258

MLT

10

2

0.0590

0.5162

CAN

1959

1310

0.0489

0.0593

MUS

1

 

0.4795

 

CHE

1675

807

0.0701

0.0511

MYS

259

166

0.0931

0.0603

CHL

172

25

0.0965

0.0570

NAM

5

5

0.0720

0.0349

CHN

585

12

0.0691

0.1557

NLD

533

355

0.1002

0.1125

CYM

4

3

0.0454

0.0378

NOR

261

96

0.0409

0.0189

CYP

1

 

0.0442

 

NZL

22

13

0.1038

0.0945

CZE

27

11

0.1157

0.0734

OMN

6

 

0.1574

 

DEU

4787

1454

0.0370

0.0296

PAK

27

 

0.0243

 

DNK

445

249

0.0435

0.0300

PHL

10

1

0.1624

0.0130

EGY

1

 

0.3377

 

POL

231

104

0.0821

0.0219

ESP

4669

1043

0.0657

0.1084

PRT

185

37

0.0408

0.0195

EST

26

18

0.1056

0.0416

QAT

1

 

0.0903

 

FIN

277

82

0.0807

0.0879

ROU

9

 

0.1203

 

FRA

3022

1172

0.0606

0.0455

RUS

10

5

0.0898

0.0909

GBR

5624

3952

0.0543

0.0561

SAU

21

2

0.1587

0.3813

GIB

2

2

0.0529

0.0140

SGP

521

286

0.1034

0.0622

GRC

88

30

0.0451

0.0246

SVK

17

5

0.3294

0.0828

HKG

755

359

0.1230

0.0408

SVN

81

40

0.0413

0.0416

HRV

27

9

0.1559

0.0955

SWE

733

277

0.0496

0.0188

HUN

35

15

0.0824

0.0367

THA

227

1

0.0347

0.0100

IDN

18

 

0.0618

 

TTO

1

1

0.0396

0.0484

IND

1061

6

0.0660

0.0253

TUR

25

24

0.0458

0.0467

IRL

292

169

0.0386

0.0255

TWN

404

124

0.0745

0.0743

ISL

4

1

0.0447

0.0314

USA

11,476

10,338

0.0443

0.0845

ISR

699

397

0.1425

0.0475

VNM

8

4

0.1422

0.1193

ITA

873

343

0.0406

0.0381

ZAF

575

472

0.0908

0.0975

JOR

1

 

0.1285

 

ZWE

2

 

0.1249

 

JPN

1e722

435

0.0648

0.2192

     
     

Total (Avg)

48,081

25,462

(0.0990)

(0.0740)

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Beracha, E., Cashman, G.D. & Skiba, H. Specialization and Institutional Investors’ Performance – Evidence from Publicly Traded Real Estate. J Real Estate Finan Econ 62, 48–80 (2021). https://doi.org/10.1007/s11146-019-09732-w

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