REITS: Attributes of alpha generation in Kania Global Real Estate CAI Index
This note summarizes key attributes of alpha generation in Kania Global Real Estate CAI Index (CAI Index) compared to its market-cap weighted benchmark. More specifically, investors typically consider the following attributes as essential in evaluating any allocation solution; firstly, how accurate is the process or methodology underpinning the solution; secondly, how consistent is the process or methodology in generating the outcome that is sought; and thirdly, does the solution provide any diversification benefits that are meaningful or unique when considered as part of an overall exposure or allocation.
We will not repeat background information regarding the structure of the CAI Index and the solution it provides to some portfolio inefficiencies in the sector, readers interested in background information can read the following IPE Real Estate article, REITS: Unleashing alpha opportunities available here goo.gl/cCdKVF. The only point we would like to reiterate is that the CAI Index is a multi-factor index based on factors relevant to real estate markets and real estate securities markets as in our view applying general equity market factors on the sector may be inconsistent with the asset class. The CAI Index methodology focuses on economic growth with conservative risk profile.
Kania Global Real Estate CAI Index, Profile
The CAI Index is structured with full alpha generation capacity compared to the underlying benchmark.
At each re-balancing the CAI Index has a 50% active share throughout the entire opportunity set, by segments representing large-, mid- and small-caps of the sector. The chart below illustrates relative performance of the CAI Index vs its market-cap weighted benchmark. As shown, the CAI Index has historically generated significant alpha returns of approximately +600bps pa and equally importantly, the live-to-date performance is in line with this profile.
Accuracy and Consistency
The CAI Index multi-factor methodology exhibits high degree of accuracy and consistency throughout real estate and financial market cycles over the past 10 years.
Any process or methodology including those related to alternative beta indices which aim to deviate from a purely market-cap weighted passive benchmark can be considered a form of 'security selection' process in relation to the benchmark itself. Evaluating attributes such as accuracy and consistency is therefore essential in gaining better understanding of the strengths and weaknesses of the process. In order to evaluate these attributes we evaluate each semi-annual index re-balancing period as a unique 'portfolio' (as new index constituents and their respective weights are selected at the time of re-balancing) and compare the relative performance of each to the benchmark over the following semi-annual period. The charts below illustrate the performance and aggregate metrics of these 20 semi-annual 'portfolios' over the past 10 years.
As the charts illustrate, the accuracy and consistency of the methodology as well as the magnitude of those attributes has historically been relatively high:
Out of 20 semi-annual 'portfolios'/index re-balancing periods, 15 had positive performance relative to underlying benchmark, i.e. 75% of semi-annual 'portfolios' generated out-performance. (3:1 ratio)
There is no single 'portfolio' that has a significant impact on the result, i.e. no significant outlier 'portfolios'.
On average, Positive 'portfolios' generated out-performance of ca 4.4% over the semi-annual holding period, while Negative 'portfolios' generated under-performance of ca -1.4% (3.2:1 ratio)
Diversification benefits
Lastly, as the proprietary CAI Index multi-factor methodology focuses on factors relevant to real estate markets and real estate securities markets rather than general equity market factors, it can potentially offer additional benefits in terms of factor diversification.
Live index performance as of 15.01.2017, listed on NYSE Arca as of 12.06.2017, Thomson Reuters acts as Calculation Agent for Kania Advisors indices.
For information about our indices or factor scores, please contact info@kaniaadvisors.com
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real estate allocations and investment programmes. We provide advice and solutions to improve outcomes in real estate investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.