IIJournals JPM-Special Real Estate Article Collection | страница 27

Pension find size is unlikely to be an explanation for this:
US pension funds are, on average, larger than those in
Canada and Australia/New Zealand.
External management used to be far less popular in
the rest of the world, but it is gaining ground, and the
percentage of pension funds using external management
in real estate has increased from 60% in the late 1990s
to 80% in 2009. As one would expect, the smallest
pension funds that invest in real estate are most likely
to use external management, and as the funds increase
in size, the likelihood of using internal management
for at least part of the portfolio goes up. However, even
of the funds in the largest quintile, 60% opt exclusively
for external management, and a further 20% combine
internal and external management. So, we conclude that
external management is clearly dominant in the real
estate investments of the global pension fund industry,
no matter whether institutional investors are small or
large. The next section investigates the implications of
this finding for costs and performance.
COSTS AND PERFORMANCE

From the perspective of the participants in a pension plan, the only valid reason to put additional layers
of intermediation between the plan and the cash f low
producing assets is that these layers add value in terms
of net returns. We use this section to explore whether
that is the case in pension fund real estate investments.
We first study the gross and net returns and the net
benchmark-adjusted returns for the overall real estate
allocation and for the different subcategories and investment approaches.3

Exhibit 7 shows that real estate has generated a
gross annual return of 7% for the 20 years since 1990.
Net of costs, this was 6.19% annually, and the benchmark-adjusted return was, on average, –0.70%.
When we address the performance of direct and
indirect real estate separately, we observe that direct real
estate investments have generated a net return of 5.88%
and have, on average, underperformed benchmark. The
difference between gross and net annual returns has been
82 basis points, on average. Indirect real estate has done
better for pension funds in three ways: the gross return was
higher (10.92%), the cost wedge between gross and net was
lower (29 basis points), and the benchmark-adjusted return
was positive (although not statistically significant).
Looking at investment approach, we find that
internal management has been superior to external management and especially to fund-of-funds. The internal
approach had a gross annual average return of 7.77%, of
which 7.51% was actually delivered to the pension plan,
so annual costs were only 16 basis points.4 Internal mandates also outperformed their benchmarks, on average.
So the average performance of internal mandates is quite
reasonable.
Turning to the added value of external managers,
the results are less favorable. It’s no surprise that the cost
wedge between gross and net returns is higher than for
the average internal mandate: 84 basis points, on average.5 This implies that it would be difficult for external
managers to beat the net return of internal benchmarks,
even if they would be able to extract a superior gross
return from the real estate assets. However, it turns out
that the average annual gross return on external mandates is almost a full percent lower than for internal

EXHIBIT 7
Pension Fund Performance in Real Estate

Note: We present the time series averages of cross-sectional mean returns in percentages for the 1990–2009 time period ( for fund-of-funds 1995–2009).
Standard deviations of the returns are in brackets.

38

A GLOBAL P ERSPECTIVE ON P ENSION FUND INVESTMENTS IN R EAL ESTATE

JPM-ANDONOV.indd 38

SPECIAL R EAL ESTATE ISSUE 2013

9/17/13 9:09:04 PM