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Trends in Real Estate Mutual Fund Efficiency

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  • Joseph R. Nicholson
  • Peter L. Lohrey

Abstract

This paper examines real estate mutual fund (REMF) efficiency from an investor’s perspective during the 2008–2010 real estate investment trust (REIT) liquidity crisis. Investors not only regained confidence in REITS—they also sought REMFs in order to find undervalued assets. We employ data envelopment analysis (DEA)—a non-parametric statistical procedure that tests whether decision-making units are operating on their efficient frontier—to measure the performance of REMFs for the years 2001–2016. We find evidence that there were a significant number of inefficient REMFs during this period. We also find that inefficient REMFs had to decrease their fees, given their rates of return. Finally, these REMFs increased their rate of return efficiency after the crisis. The primary sources of inefficiency were excessive front load, deferred load, and 12b-1 fees, combined with higher levels of cash positions as a percentage of total assets. This is important given that the majority of REMFs are invested in REIT assets and that individuals invest in REMFs for their enhanced liquidity compared to direct REIT investments. If REMFs are to remain competitive as an asset class, they must maintain reasonable expense ratios.

Suggested Citation

  • Joseph R. Nicholson & Peter L. Lohrey, 2020. "Trends in Real Estate Mutual Fund Efficiency," Journal of Real Estate Practice and Education, Taylor & Francis Journals, vol. 22(1), pages 1-12, January.
  • Handle: RePEc:taf:rjrpxx:v:22:y:2020:i:1:p:1-12
    DOI: 10.1080/15214842.2020.1757353
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