REITS: State of Active Management, H2 2018
This note summarizes current state of active profile in actively managed global real estate securities funds, as of H2 2018. Active profile presented here relates to the composition and distribution of active share for the sector. We also present changing trends in composition and concentration of portfolio holdings.
Generally, active managers have continued to improve active profile, the overall active share for the sector as of H2 2018 stands at 56% compared to 52% in H2 2017. There has also been a meaningful improvement in active share of large-caps (top 1/3rd of market-cap weighted investable universe), a segment that historically had low active share utilization.
Witold Witkiewicz, comments, “Currently active share utilization in the large-cap segment stands at close to 70%, significantly higher compared to 48% only two years ago. This implies that actively managed products now provide a much better value proposition to investors as managers utilize the opportunity set more efficiently in search of alpha. This is an important improvement and the focus will now inevitably shift to consistency of investment processes to generate performance.”
Active Share utilization by segment
Segments are defined as large-, mid-, and small-caps, each representing 1/3rd of total benchmark market capitalization.
Increased concentration in less liquid portfolio holdings
While improvements in active profile throughout the opportunity set have been positive for investors, at the same time active managers have continued to add more concentrated bets in the less liquid small-cap segment (bottom 1/3rd of market-cap weighted investable universe). Average weights of portfolio holdings in small-caps in proportion to the relevant constituent’s benchmark weight have risen by 25% over the past two years, from an average multiple of 4.5x to 5.7x.
Fatter Tails in less liquid portfolio holdings
The share of concentrated portfolio holdings in less liquid small-caps, with portfolio weight to benchmark weight multiples of 6x and above, has risen by nearly 2/3rds over the past two years. “This may imply that actively managed global real estate securities allocations could become more sensitive to general market liquidity conditions.”, Witold Witkiewicz.
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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.