REITS: Summing up a decade of active management, "Why won't active managers pick stocks?"

A brief summary of portfolio construction practices over the past decade in active management of global real estate securities.

2006-2016

Portfolios entirely inactive with average fund level active share below 50% and closer to 40%.

Large-caps that active managers can be expected to have the best knowledge of and that offer highest capacity to construct truly active portfolios are nearly fully indexed with minimal active share in this segment.

2017

Portfolios migrate further into higher active share, on average reaching approximately 50% active share. Active profile improves throughout the opportunity set but less in large-caps that continue to be an underutilized segment.

2018

Portfolios migrate further into higher active share, on average reaching full active profile of 50% active share.

Large-cap segment somewhat better utilized but still below expected profile and capacity, closing approximately half of previous utilization gap. Instead portfolios migrate to larger positions in small-caps effectively creating higher concentration and tail-risks in less liquid stocks. Average size of portfolio holdings in small-caps increases by ca 25% from a multiple of 4.7x (portfolio weight compared to benchmark weight) to 6.0x during a two-year period. Tail-risks, exposure to less liquid, concentrated holdings at multiples of 6.0x or higher increase by over 60% during this time.

Large-cap segment continues to be meaningfully underutilized resulting in active costs for significant inactive parts of portfolios. In addition, the less obvious cost absorbed by investors that also originates directly from these inactive exposures is the opportunity cost related to returns that potentially could have been generated had managers constructed fully active portfolios throughout the entire opportunity set.

"Looking at portfolio construction practices in global real estate securities funds over the past decade-plus, the one thing that asset owners probably want to ask about their actively managed allocations is "Why won't active managers pick stocks?" comments Witold Witkiewicz, Founder of Kania Advisors.

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About Kania Advisors

Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets 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.