Alternative Index (Smart Beta) strategies for REIT Mutual Funds

This paper looks at the effectiveness of Alternative Index (Smart Beta) strategies for funds concentrated in listed real estate equities. In particular, we examine not just the impact on raw returns relative to a standard (free float market capitalisation weighted) benchmark throughout the cycle, but in particular we look at the subsequent level of tracking error and compromise in liquidity to determine appropriate risk adjusted returns.The paper use the EPRA Global Developed Index as the benchmark, and looks at monthly data over a 20 year period (June 1994-2014) for three regions; North America, Europe, and Asia Pacific. The periods are divided into distinct phases of the cycle to determine the effectiveness of each strategy, in each region, at each stage of the cycle.The weighting strategies we use are: Equal Weighting, Fundamental (Gross assets and NOI), Valuation (Relative Dividend Yield, and Price to Book Value), Volatility, and LeverageThe usefulness of Alternative Indices in asset allocation has been examined in detail for generalist equity funds, but there is little literature on the impact on sector specific funds in general, and real estate securities funds in particular.The results provide valuable insights into how superior risk adjusted returns can be generated at different stages of the cycle by tilting the portfolio concentration away from free float market capitalisation towards alternative medium term buy-and-hold strategies, whilst minimising risk as defined by tracking error and liquidity reduction.