UK real estate fund performance ERES Stockholm, June 2009 Malcolm Hunt (IPD), Tony Key, Stephen Lee (Cass Business School)

The paper First stage of programme to unpack IPD fund returns –performance ranges, momentum, consistency –attribution by activity (trading, development), allocation / selection –influences of size, specialisation … and so on First stage: what measure of relative returns? –IPD practice simple comparison of total returns –extensive literature recommending risk adjustment –previous papers Research –IPD complete fund histories –apply battery of risk adjusted performance measures –test ability to discriminate, illuminate fund performance

Risk adjusted performance measures A large but still not exhaustive catalogue Absolute risk –Sharpe, Mod Sharpe, M 2 RAP, Information Ratio, Sortino, Max DD, Value at Risk, Calmar Ratio (Max Drawdown) Relative risk –Treynor, Jensen, Appraisal Ratio Previous literature –Real estate: Webb & Myer (1994), Myer et al (1997) risk adjustment produces significant changes in fund ranking –Alternative assets: Pfingsten, et al (2004), Pedersen and Rudholm- Alfvin (2003) and Eling and Schuhmacher (2006) risk adjustment has very little impact on rankings

The data set IPD fund records: annual return on full portfolios Total of 535 at any time , 201 still extant Analysis of 88 funds with continuous records –period long enough to provide robust measure of risk –and take funds through 1.?? completed cycles High apparent rate of attrition –but mainly from structure changes by managers / investors –or from (tedious) IPD recording technicalities Checks for survivor bias …

Survivor bias? TTest checks for -differences in mean returns each year for survivors vs other samples - differences in means of average returns over 25 years for survivors vs other samples

88 funds, distribution of 25 year average return Mean9.92 Median9.72 Maximum14.78 Minimum7.39 Std. Dev.1.35 Skewness1.42 Kurtosis5.82 Jarque-B58.86 Probability0.00

88 funds – returns vs risk

88 funds, set of risk measures

Risk adjusted performance results

88 funds, alternative risk adjustments….

Ranking differences – 2 extreme funds Rank Percentile Position

Summary & conclusions Limitation: all funds benchmarked vs IPD Universe –will check with fund-specific benchmarks (but won’t change results) Risk adjustment less interesting than it looks … –surprisingly minor changes in broad rankings –statistically very high agreement with simple total return ranking –and little differentiation between alternative measures But still enough to influence views of individual funds –comparison of measures informative about return characteristics To follow: consistency, persistence, attribution …