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SMART BETA STRATEGIES FOR REIT MUTUAL FUNDS
Alex Moss, Consilia Capital Kieran Farrelly, The Townsend Group
American Real Estate Society Conference Fort Myers , Florida
April 2015
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CONTENTS
• Background
• Purpose of the Study
• Data
• Methodology
• Results
• Conclusions and Next Steps
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BACKGROUND – KEY POINTS
• Post GFC, there has been a change in emphasis on the factors which influence investment decisions, affect performance, and determine asset allocation mixes, and product design, which are particularly relevant for real estate. Namely;
• Focus on income based assets in a low interest rate environment (real estate)
• Increased emphasis placed on liquidity (REITs*)
• Interest in combining asset types for specific solutions ( listed/unlisted for DC schemes)
• Emphasis on diversifying away equity and bond market risk (low correlation “alternative” buckets)
• Greater use of maximum drawdown as a key risk measure (DC funds )
• Growing acceptance of certain Smart Beta strategies (active management at passive cost)
*For simplicity the term REITs is used to describe all global listed real estate markets in this paper.
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BACKGROUND –KEY QUESTIONS
• Against this background, what Smart Beta strategies can be developed to provide the
investment solutions and risk/return profiles currently required by asset allocators?
• Is it possible to devise automated trading strategies (with a low turnover) which will enhance performance?
• Are there likely to be more Smart Beta products for REITs ? Currently we are aware of the Kempen Fundamental Index strategy and the Dow Jones Townsend Core REIT Index.
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BACKGROUND - DOW JONES TOWNSEND CORE US REIT INDEX
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• This Index aims to measure the performance of a basket of securities that could serve as a public-market analog for privately-held institutional “core” real estate investments
• To be eligible , a company must be both an equity owner and operator of commercial and/or residential real estate and meet minimum requirements for size and liquidity
• Specifically excluded are companies invested in the following property types: Factory Outlets, Hotels, Manufactured Homes, Mixed Industrial/Office and Suburban Office
26.0%
14.6%
18.0%
9.9%
22.7%
15.4% 17.7%
9.3%
1-year 3-year 5-year 10-year
Annualized Total Return - Gross of fees as of end of February 2015
Dow Jones Townsend Core U.S. REIT Index MSCI US REIT Index Total Return
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PURPOSE OF THE STUDY
In this study we are interested in discovering whether the free float market capitalisation weighted global benchmark would have consistently underperformed a Smart Beta strategy utilising the following factors :
1) Gross Assets
2) Equal Weighting
3) Gearing - Loan to Value ( Low and High) - EW
4) Valuation - Price to Book Value (Low and High) - EW
5) Size – Gross Assets (Small and Large) - EW
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CAVEATS
• No transaction costs are taken into account
• Portfolios are only rebalanced at calendar year ends and then held for the next 12 month period
• No constraints such as minimum liquidity , maximum number of portfolio constituents etc have been applied
• No account has been taken of resultant regional weightings
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DATA
• EPRA Global Developed Index constituents
• COMPUSTAT for fundamental data
• Bloomberg and CRSP for share price and total returns data
• Frequency: Annual
• Currency: US$ (Unhedged)
• Return: Total Return
• Period: 2004-2014
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METHODOLOGY
• Key metrics used: Loan to Value (LTV) , Gross Assets (GA), Price to Book Value (PBV)
• Establish benchmark constituents on an annual basis – this is the initial selection criteria
• Determine annual returns for all constituents
• Determine fundamental data (LTV, GA, PBV) for all benchmark constituents
• Sort by quartile (if appropriate)
• Apply weighting criteria (EW, Gross Assets)
• Calibrate portfolio annual return
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RESULTS – GROSS ASSETS
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Total Asset Weighted 38.04% 17.21% 43.70% -9.12% -47.61% 80.66% 24.02% -9.37% 30.94% 13.56% 16.97%
Smart Beta Relative 5.91% 1.96% 1.77% -1.92% -0.22% 43.11% 3.95% -3.72% 1.95% 9.26% 1.25%
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RESULTS – EW
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight 39.20% 17.27% 44.24% -8.49% -44.10% 60.57% 27.47% -7.90% 30.02% 11.91% 16.40%
Smart Beta Relative 7.08% 2.02% 2.31% -1.30% 3.29% 23.02% 7.39% -2.24% 1.03% 7.60% 0.68%
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RESULTS – GEARING
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight Low LTV Quartile 40.56% 26.59% 47.75% -7.01% -47.59% 83.98% 13.12% -13.62% 28.07% 11.30% 11.07%
Smart Beta Relative 8.43% 11.34% 5.82% 0.19% -0.20% 46.43% -6.96% -7.97% -0.91% 6.99% -4.65%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight High LTV Quartile 37.72% 16.70% 46.62% -17.48% -42.07% 56.59% 42.95% -2.82% 30.12% 7.40% 23.09%
Smart Beta Relative 5.59% 1.45% 4.69% -10.28% 5.32% 19.05% 22.88% 2.83% 1.13% 3.10% 7.37%
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RESULTS- VALUATION
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight Low BTM Quartile 35.21% 20.72% 39.48% -14.59% -34.29% 28.39% 29.85% -0.85% 25.05% 5.31% 25.94%
Smart Beta Relative 3.08% 5.47% -2.46% -7.39% 13.10% -9.15% 9.78% 4.80% -3.93% 1.01% 10.22%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight High BTM Quartile 44.41% 14.46% 46.29% -2.85% -46.06% 117.51% 37.63% -7.41% 28.06% 16.45% 9.91%
Smart Beta Relative 12.28% -0.79% 4.36% 4.35% 1.32% 79.96% 17.56% -1.76% -0.93% 12.14% -5.81%
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RESULTS – GROSS SIZE
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight Low Total Assets Quartile 37.97% 26.16% 42.30% -3.66% -40.23% 50.27% 23.95% -8.17% 30.95% 10.17% 16.85%
Smart Beta Relative 5.84% 10.91% 0.37% 3.54% 7.16% 12.73% 3.88% -2.52% 1.96% 5.86% 1.13%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FTSE EPRA/NAREIT Developed Index TR 32.13% 15.25% 41.93% -7.20% -47.39% 37.55% 20.08% -5.65% 28.99% 4.31% 15.72%
Equal Weight Hightotal Assets Quartile 38.39% 16.62% 40.68% -13.84% -49.77% 76.34% 22.49% -7.80% 28.20% 12.73% 17.16%
Smart Beta Relative 6.27% 1.37% -1.26% -6.65% -2.38% 38.79% 2.41% -2.15% -0.79% 8.42% 1.44%
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RESULTS – OVER TOTAL PERIOD
Mean Geo Mean
FTSE EPRA/NAREIT Developed Index TR 12.34% 8.92%
Equal Weight 16.96% 13.03%
Total Asset Weighted 18.09% 13.20%
Equal Weight Low LTV Quartile 17.66% 12.48%
Equal Weight High LTV Quartile 18.08% 13.97%
Equal Weight Low BTM Quartile 14.57% 12.07%
Equal Weight High BTM Quartile 23.49% 17.25%
Equal Weight Low Total Assets Quartile 16.96% 13.72%
Equal Weight Hightotal Assets Quartile 16.47% 11.50%
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CONCLUSIONS AND NEXT STEPS
• Promising initial results
• Simple Smart Beta strategies can create material performance differentials vs the index
• Next Steps:
• Make use of higher frequency and longer time series data
• Explore additional strategies – fundamental and technical
• Incorporate additional filters such as liquidity and regional constraints
• Include transaction costs – measure ‘real’ investor level returns
• Assess regional level strategies
• Factor model, risk and diversification potential (within real estate and multi-asset levels) analysis
• Explore whether there is a cyclical dimension to the various strategies which is predictable
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