Are All Open-End Core Funds Created Equal?

Abstract

Open-end core real estate funds (OECFs) are an important component of the institutional property markets, but have received scant attention in the research literature. Fairchild, MacKinnon, and Rodrigues examine a sample of OECFs to determine if their underlying portfolios are consistent with common definitions of “core” and to what extent core funds provide beta exposure to the market. Generally, OECFs appear to hold core-type portfolios, but this is not universal. In particular, smaller funds tend to be less diversified and have higher idiosyncratic volatility. Many OECFs have a surprisingly large exposure to development projects. The authors find that leverage also plays a key role in an analysis of OECFs. While most OECF returns are driven by the broad market, OECFs are usually an aggressive play on the market, with each fund’s aggressiveness determined by its leverage. Further, although the authors find evidence of persistence in OECF returns, a closer look reveals that this may be due to funds varying their capital structure over time. Overall, while most OECFs appear driven by similar factors, not all are created equal; investors should conduct careful due diligence on their OECF investments, with special attention to fund size and leverage.