Joint SPR/IPF/INREV 2021 Nick Tyrrell Research Prize Webinar
9 December 2021

It pays to be a country specialist

As the webinar host, Iryna Pylypchuk, Director of Research and Market Information at INREV reminded attendees that this was the tenth anniversary of the Nick Tyrrell Research Prize.  Nick is remembered not just for his passion for innovative research, but also for its applicability to issues in the real world, and this year’s winning paper, ‘Do specialist funds outperform? Evidence from European non-listed real estate funds’ is very much in that tradition.

Highlights of the paper were presented by Nick Mansley of the Cambridge Real Estate Research Centre, joint author alongside Franz Fuerst and Zilong Wang, also of Cambridge. The key findings were that those funds specialising in investing either in a single country or country-sector combination outperformed more diversified funds, but that there was no evidence of sector specialist funds outperforming.  Mansley stressed that this picture of outperformance by country specialist funds was driven entirely by their returns in the long recovery period stretching from 2010 to 2019, while there was some suggestion that diversified funds had outperformed during the downturn of 2007-9.

Mansley then explained the process employed in the research. Specialist funds were identified either through their share of value in sectors and countries or via self- identification, which was used to generate 4272 performance observations across 592 funds for the period 2001-19.  The research used INREV fund return data and analysed performance as the function of various factors including market returns, specialisation and other characteristics of the fund such as leverage and size. Looking at the data this way produced a set of conclusions that had not been evident for previous studies, for instance on REITs, which had proven largely inconsequential.

In the wide ranging panel discussion and audience Q&A that followed, Mansley admitted that the biggest surprise in the work had probably been the lack of evidence for any benefit from sector specialisation overall, although there were indications that such funds tended outperform in periods of good market performance but underperform in less favourable conditions.

When asked to give their broad impressions of the research, all the panellists were fulsome in their praise.  Nigel Allsopp of residential specialists Greystar said that it had been a ‘herculean task’ to pull so much data together.  He believed it was particularly valuable to have research covering such a long period, but like Mansley he also wondered about the lack of evidence for a sector effect.  Perhaps this would be more apparent if one could look at more operationally intensive ‘alternative’ sectors, something not yet possible due to small samples sizes. He also suggested that it would be interesting to see similar results post-Covid.

Thomas Kallenbrunnen of logistics specialists Garbe Institutional Capital agreed that the prize winners deserved kudos for producing work that was so relevant to the industry.  His key takeaway was the importance of being local, particularly for deal picking and proximity to tenants, although he reflected that today many investors’ tenants were becoming more pan-European.

The third panellist, Anne Koeman-Sharapova of Mercer, said that they tend to advise clients to invest in more diversified funds, as these have the ability to change course in response to market conditions.  But in response to a question from the audience, she noted that there was a wide range of performance between funds, whether specialist or diversified.  This means that the choice of manager is paramount.

Mansley agreed that there was a lot of ‘noise’ beneath the surface of the research, which suggested that it was as important for investors to avoid making the wrong decision in picking funds than in getting it right. If not, they could easily end up as ‘toast’, he said.

Looking to factors that might influence how funds performed in the future, Allsopp stressed the ability to fund capex, particularly in the context of sustainability and energy transition, while Kallenbrunnen highlighted the capability to generate income growth in a period of higher inflation.

To wrap up the seminar, the panellists considered how the research might potentially evolve going forward.  Kallenbrunnen thought it would be interesting to look into the effects of management capabilities on performance and to assess the impact of asset size within fund portfolios. Allsopp suggested that if the research was rerun in five years’ time, a bigger role for sector specialists might emerge.  In any event, it was clear that there would be a lot of interest in extending the scope of the research in the future.

Tim Horsey