Alex Moss

Trend Following and Momentum Strategies for Global REITs

This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination of the two. We examine the results in terms of both a dedicated Global REIT exposure, and the impact on a multi-asset portfolio. We find that the main improvements arise when the broad index is replaced with one of the four trend following (TF) strategies. The portfolios deliver similar returns but volatility is reduced by up to a quarter to the 8-9% range, the Sharpe ratios increase by 0.1 to 0.5 with the main benefit being the reduction in the maximum drawdown to under 30% compared to 43% when the broad index was used. We thus find that a combined momentum and trend following Global REIT strategy can be beneficial for both a dedicated REIT portfolio and adding REITs to a multi-asset portfolio.

The performance of a blended real estate portfolio for UK DC investors

Purpose - – The purpose of this paper is to provide a better understanding of the performance implications for UK DC pension fund investors who choose to combine global listed and UK unlisted real estate in a blended allocation relative to a pure unlisted solution. Design/methodology/approach - – Blended listed and unlisted real estate portfolios are constructed. Investor risk and returns are then studied over the full 15 year sample horizon and distinct cyclical phases over this period using a number of risk-return metrics. Performance is then contrasted with that of a pure unlisted solution, as well as UK equity market and bond total returns over the same period. Findings - – A UK DC pension fund investor choosing to construct a blended global listed and UK unlisted real estate portfolio would have experienced material return enhancement relative to a pure unlisted solution. The “price” of this enhanced performance and improved liquidity profile is, unsurprisingly, higher portfolio volatility. However, because of the improved returns, the impact upon measured risk adjusted returns is less significant. Practical implications - – Relatively liquid blended listed and unlisted real estate portfolios create efficient risk and return outcomes for investors. Originality/value - – This study uses actual fund rather than index data (i.e. measures delivered returns to investors), has chosen a global rather than single country listed real estate allocation and is focused on providing clarity around the real estate exposure for a specific investment requirement, the UK DC pension fund market.

The Use of Listed Real Estate Securities In Asset Management

Investors have historically used listed real estate to achieve a number of outcomes, ranging from general exposure to the asset class to meeting specific returns characteristics such as inflation hedging and tax-efficient income generation. However, following the events of the last five years, in common with other asset classes there is currently a re-assessment of the risk and return profile of listed real estate. The purpose of this study is twofold: (i) to conduct a review of academic literature and evidence on the use and performance of listed real estate, both as a separate asset class and in multi-asset portfolios, and (ii) to examine in detail how institutions are using listed real estate to achieve their investment objectives, and the role listed real estate is playing in the new fund structures they are creating to meet investor objectives

The impact of liquidity on the valuation of European real estate securities

Purpose – The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’ shares. Design/methodology/approach – Six groups are derived for our sample of European listed real estate companies. They are split between the UK and Europe, and then both sets are categorised by liquidity as large, medium or small. These are then tested for market depth, market tightness and difference in valuations over the cycle 2002-2012. Intuitively, it can be expected that the stock market valuation premium for companies with greater liquidity increases post the global financial crisis. Findings – The key discriminating variable that drives companies’ liquidity and valuations is market capitalisation. For both the UK and Europe, the valuation premium of larger companies vs small companies has increased significantly since 2008 (by 20-40 per cent), which can be attributed to the increased value placed on liquidity p...

Liquidity in global real estate securities markets

Purpose - – The purpose of this paper is to test the relationship between liquidity in listed real estate markets, company size and geography during different market cycles, specifically pre-crisis (2002-2006) and post-crisis (2010-2014). Further, the study analyses the impact of stock liquidity on stock performance. In a previous study the authors examined the impact of liquidity on the valuation of European real estate shares. The result showed that there is a strong relationship between liquidity, valuation and market capitalisation post the Global Financial Crisis. Design/methodology/approach - – The paper studies the linkages between regional market liquidity and company size for 60 listed real estate companies globally and determines the key drivers of company stock market liquidity pre- and post-crisis as well as the impact on stock performance. Analysis of variance is used to test cross-sectional independence in market liquidity combined with the Tukey’s Findings - – Findings confirm previous studies that market liquidity factors are correlated globally over time indicating markets interdependence. However, sample groups by company size and geography form independent samples with different sample means, thus specific liquidity levels in each market may be different. First, stock turnover levels have not recovered post-crisis to pre-crisis levels in the majority of markets while spreads have continued moving downward to nearly insignificant levels in line with the rest of the equity market. Second, with regards to stock performance, the European bias previously detected is not apparent in the USA, and there is no evidence of the small cap vs large cap effect of small companies achieving superior returns, although smaller companies have outperformed in Europe and Asia in each of the last three years (2012-2014). Practical implications - – The key implication is that although spread levels for smaller companies are higher, implying a slight risk premium when investing in small companies, this did not manifest into consistent superior stock market returns in the periods studied. In a mature market such as the USA or UK, liquidity levels in terms of stock turnover are higher and spreads are lower thus reducing trading costs, making them more attractive for investors. Originality/value - – This research brings together previous analysis on stock market liquidity and stock performance on a global market level. It further tests the dependence of market liquidity on two key indicators, namely, geography and company size and analyses market changes with respect to liquidity pre- and post-crisis.

Can sector specific REIT strategies outperform a diversified benchmark

Purpose We investigate the performance of different portfolios of REITs which specialise by property type compared to the performance of a diversified free-float market capitalisation weighted benchmark index to determine whether superior risk-adjusted returns can be achieved.. Design/methodology/approach Firstly we examine the performance of portfolios constructed using the criteria of Equal Weight, Minimum Variance, Maximum Sharpe and Risk Parity rather than free-float market capitalisation. Secondly we apply an automated trading strategy of Trend Following to see if this filter will improve risk-adjusted returns. Findings The two step process of forming combinations of REIT sectors with the subsequent addition of a trend following overlay can offer clear benefits relative to a passive benchmark investment. Research limitations/implications Although three of the four strategies were shown to outperform the benchmark index on a risk-adjusted basis, one issue was that the efficient portfolios tended to ha...

Real Estate Company Reactions to Financial Market Regulation

This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector; the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool; the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily stock returns of real estate companies and identify the regulatory events through news published in major international financial newspapers and news agencies. Our results show different responses across the three regulations. For Basel III we find support for the regulatory burden hypothesis of the bank lending channel for small real estate firms and firms with low debt-to-equity ratios as they cannot diversify their funding sources. The direct regulatory effect as tested using AIFMD announcements supports the profit-based reaction hypothesis for large firms. We also show that the news have asymmetric effects with tighter regulation news more frequently leading to significant responses in average abnormal returns (AARs) than loosening regulation news

The blended approach to real estate allocations: performance implications of combining an exposure to German Spezialfonds with Global Listed Real Estate Securities

This paper seeks to increase the understanding of the performance implications for investors who choose to combine an unlisted real estate portfolio (in this case German Spezialfonds) with a (global) listed real estate element. We call this a “blended” approach to real estate allocations. For the avoidance of doubt, in this paper we are dealing purely with real estate equity (listed and unlisted) allocations, and do not incorporate real estate debt (listed or unlisted) or direct property into the process. Our findings are that by blending a 30% global listed portfolio with a 70% allocation (as opposed to a typical 100% weighting) to Spezialfonds, the real estate allocation returns increase from 2.88% p.a. to 5.42% pa. Volatility increases, but only to 6.53%., but there is a noticeable impact on maximum drawdown which increases to 19.4%. By using a Trend Following strategy raw returns are improved from 2.88% to 6.94% p.a. , The Sharpe Ratio increases from 1.05 to 1.49 and the Maximum Drawdown ratio is now only 1.83% compared to 19.4% using a buy and hold strategy . Finally, adding this (9%) real estate allocation to a mixed asset portfolio allocation typical for German pension funds there is an improvement in both the raw return (from 7.66% to 8.28%) and the Sharpe Ratio (from 0.91 to 0.98).

Alternative Index (Smart Beta) strategies for REIT Mutual Funds

This paper looks at the effectiveness of Alternative Index (Smart Beta) strategies for funds concentrated in listed real estate equities. In particular, we examine not just the impact on raw returns relative to a standard (free float market capitalisation weighted) benchmark throughout the cycle, but in particular we look at the subsequent level of tracking error and compromise in liquidity to determine appropriate risk adjusted returns.The paper use the EPRA Global Developed Index as the benchmark, and looks at monthly data over a 20 year period (June 1994-2014) for three regions; North America, Europe, and Asia Pacific. The periods are divided into distinct phases of the cycle to determine the effectiveness of each strategy, in each region, at each stage of the cycle.The weighting strategies we use are: Equal Weighting, Fundamental (Gross assets and NOI), Valuation (Relative Dividend Yield, and Price to Book Value), Volatility, and LeverageThe usefulness of Alternative Indices in asset allocation has been examined in detail for generalist equity funds, but there is little literature on the impact on sector specific funds in general, and real estate securities funds in particular.The results provide valuable insights into how superior risk adjusted returns can be generated at different stages of the cycle by tilting the portfolio concentration away from free float market capitalisation towards alternative medium term buy-and-hold strategies, whilst minimising risk as defined by tracking error and liquidity reduction.