Be careful when comparing real estate fund returns

By Dan Hallett, CFA, CFP on May 29th, 2011

Real estate has long formed the core of investors’ hard asset exposure.  Individuals and institutions invest in real estate for many reasons – i.e. diversification, cash flow and/or inflation protection.  As with asset classes beyond the basic (stocks, bonds and cash), investors are challenged to implement what is a sound theory.

Current landscape of real estate funds

At one time, there was no shortage of real estate mutual funds.  These funds invested directly in a portfolio of investment properties.  But the structural risks of real property funds became apparent during one of Canada’s worst real estate crises – pushing virtually all of these funds to either shut down or convert to real estate investment trusts (REITs).

As a result, most real estate mutual funds today either invest in REITs or shares of real estate management companies.  This ‘newer’ crop of real estate funds began in the mid-to-late 1990s but have seen a resurgence thanks to rock bottom government bond yields and the popularity of infrastructure investments – of which real estate is a significant component. lists more than 70 real estate mutual and segregated funds covering about 25 mandates, the oldest of which was launched in 1995.

(Note that there exist many other funds that invest in properties and are sold under private placement rules that only accept new money as sufficient opportunities are identified by the managers.  These are much harder to find and require much more due diligence.  But they can be a better alternative for those with enough money to meet these funds’ much higher minimums and enough patience to give up mutual funds’ daily liquidity feature.)

Recently, I was asked by the Globe & Mail’s Shirley Won to comment on the CIBC Real Estate Equity fund – one of the older products.  As is often the case, there was not sufficient space to fit all of my comments into the article so I’ll offer them here for those interested.

There is no doubt that the fund has performed well, given its outperformance over the benchmark.  This is more impressive when you consider that the fund’s returns are after paying its hefty 2.9% annual management expense ratio and its beefy 0.32% annual trading expense ratio (the fund’s average TER over the past five years).  This relatively high TER resulted from an average turnover rate of nearly 80% per year over the past five years.

Muddied performance comparisons

The fund’s returns, however impressive, are a little more difficult to compare to the two-dozen or so mandates against which it competes.  Most real estate funds are global in nature.  As the name suggests, this CIBC fund is heavily tilted toward Canada.  CIBC Canadian Real Estate fund is one of just seven funds in the category with at least 70% of its assets in Canadian securities.  With a Canadian dollar that has soared compared to virtually every major currency over the past nine years, this gave the fund a distinct advantage that has nothing to do with the manager’s skill.

It’s also worth noting that the iShares S&P/TSX Capped REIT Index ETF has handily outperformed the CIBC fund (itself a top performer) even after neutralizing fee differences.  BMO launched a similar product – BMO Equal Weight REITs Index ETF – about a year ago.

There are other categories of funds that featured a wide variety of investment policies.  So, when comparing funds in categories like Real Estate Equity, High Yield Fixed Income or Canadian Dividend & Income Equity don’t spend too much time comparing performance within the group.  Focus instead on the type of exposure desired (to ensure the fund’s exposure matches your needs) and the specifics of the fund’s investment objective, strategy and portfolio manager.