International Real Estate Mutual Fund Performance: Diversification or Costly Information?

• Published in: The journal of real estate finance and economics Vol. 44; no. 3; pp. 394 - 413
• Main Authors: Shen, Yang-pin, Lu, Chiuling, Lin, Zong-Han
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.04.2012; Springer Nature B.V
• Subjects: Abnormal returns; Asset allocation; crises; Diversification; Domestic real estate mutual funds; Economic crisis; Economic performance; Economics; Economics and Finance; Equity; Financial Services; funds; Growth rate; Information economics; International; International real estate mutual funds; Investment advisors; Investment trusts; investors; Literature reviews; Market timing; Market timing ability; Mutual funds; Portfolio diversification; Portfolio management; Property; Rates of return; Real estate; Real estate market; Regional/Spatial Science; REITs; Securities markets; Statistical analysis; Studies; G11; Fund performance; International real estate mutual funds; Mutual fund flows; Stock selection ability; G15; Domestic real estate mutual funds; Market timing ability
• ISSN: 0895-5638; 1573-045X
• DOI: 10.1007/s11146-010-9257-0

We investigate the net effect between diversification benefit and information cost of international real estate mutual funds from three dimensions: whether investors can benefit from investing in international real estate mutual funds, whether managers of international real estate mutual funds possess superior market knowledge and timing abilities, and whether investors are motivated by returns or diversification. Our findings are threefold. First, the results show that international real estate mutual funds perform better and are less risky than domestic real estate mutual funds before Jun 2007. That is, diversification benefits outweigh the information costs, and investors therefore gain from investing in international real estate mutual funds. However, the benefit is reduced because of the economic shock of sub-prime financial crisis. Second, on average, neither international mutual fund managers nor domestic mutual fund managers possess market timing abilities. Finally, we find that fund flows are driven by investors’ return-chasing behaviors and fund size, but not by diversification purpose.