Real estate is often overlooked in the active/passive debate, with most of the focus having fallen on equities and bonds. Real estate hasn’t been explored in as much detail – possibly due to the more limited data available on the asset class, or maybe because real estate tends to occupy a smaller portion of portfolios than stocks and bonds. Nonetheless, both S&P Dow Jones and Morningstar publish data on the performance of REITs vs their benchmarks, and the numbers are consistent with what we’ve already seen with equities – passives come out ahead on both an absolute and risk-adjusted basis vs their active REIT counterparts.
Summary
- Both S&P and Morningstar find that 74%-83% of REITs underperform their passive benchmarks over the last 10-20 years, depending on geography and time period.
Section 1 of this post focuses on 2 sources of data: the Morningstar Active/Passive Barometer and the SPIVA reports. Both reports are updated every 6 months, and are cited widely in the industry as being the “scorecard” for assessing the performance of active funds. Both studies are conducted independently using their own separate data sets.
Section 2 contains a selection of other recent relevant studies that also contribute to the active/passive performance debate. Despite not being updated as regularly as the Morningstar and SPIVA reports, their conclusions are equally worth reading.
Section 1
The Morningstar Active/Passive Barometer and the SPIVA reports
This section summarises the performance of active funds investing in real estate over the last 10-20 years, relative to their passive benchmarks. Data is taken from 2 sources – Morningstar and S&P Dow Jones. There is considerably more data in the underlying reports, which can be found here, here, and here.
Highlights
- According to S&P, 83% of US-domiciled REITs underperformed their benchmark over the last 15 years, with 72% underperforming on a risk-adjusted basis. Morningstar find similar results, with 74% of US REITs underperforming over 20 years, and 77% of global REITs underperforming over 10 years.
- Looking at European REITs, 81% of European REITs investing in Europe underperformed their benchmark over the last 10 years, and 85% of European REITs investing in Asia underperformed.
- Survivorship-wise, 46%-62% of REITs survived after 10-15 years, falling to 42% survivorship after 20 years.
Performance
NB: S&P Dow Jones compares active funds’ performances against their S&P-assigned costless benchmark, based on the funds’ Lipper classifications. Morningstar compares active funds’ performances against a composite of actual passive funds – their “benchmark” reflects the actual, net-of-fees performance of passive funds.
Risk-adjusted performance
NB: Standard deviation of monthly returns, over a given period, is used to define and measure risk. The return/risk ratio is used to evaluate managers’ risk-adjusted performance. Returns of the benchmarks are also adjusted by their volatility.
Survivorship
NB: Survivorship is calculated by dividing the number of distinct funds that started and ended the period in question by the total number of funds that existed at the onset of the period in question (the beginning of the trailing one-, three-, five- and 10-year period)
Section 2
Further evidence from other sources
There’s nothing here yet! Despite my best efforts, I haven’t managed to find any additional sources of information for how the active/passive debate relates to real estate investing. Please get in contact if you know of any, and I’ll update this section accordingly.