Asset Allocation and the Performance of Real Estate Mutual Funds

Abstract

We examine the performance of real estate mutual funds during January 1991–December 1997. As a group, the sampled funds outperformed the Wilshire Real Estate Securities Index on a risk‐adjusted basis by more than 5 percentage points annually. We attempt to explain these surprising findings by examining the fund's asset allocations across stocks, bonds and real estate property types using Sharpe's (1992) effective‐mix test. We find that all of the superior performance is attributable to fund managers' decisions to overweight outperforming property types (apartments and health care) relative to the Wilshire Real Estate Securities Index weights. Performance of the funds matches a multiple‐property‐type benchmark that takes account of the fund's exposure to each property type. Therefore, real estate funds demonstrated superior allocation across property types, but neither superior nor inferior selection within property type, during 1991–1997. Our findings emphasize the importance of asset allocation for real estate mutual‐fund performance.