IIJournals JPM-Special Real Estate Article Collection | Page 29

For pension plans in the United States, the higher
costs are ref lected in a lower net performance than their
foreign peers: On average, they underperform in each of
the quintiles, although the performance difference is not
always statistically significant. The non-US funds in the
largest quintile seem to outperform their benchmarks.
CONCLUSIONS

We document that large and small pension funds
invest in real estate using strongly contrasting channels.
Indirect real estate is mostly favored by larger pension
funds in combination with allocations to direct real
estate. Smaller pension funds mostly ignore indirect
real estate investments and focus on direct real estate
investments only. Moreover, larger pension funds are
more likely to invest internally, whereas smaller funds
are more likely to invest through external managers or
fund-of-funds. These choices have consequences: We
find that larger pension funds generally have lower costs
and better performance in real estate investment.
This may be due to larger funds obtaining cost
advantages, but it is also possible that larger pension
funds can assert more negotiating power in real estate
investments, which could lead to access to more favorable
investment opportunities at lower costs. Larger funds
can also commit more resources to monitor external real
estate investment managers or even establish internal
divisions, which is positively linked to performance.
Another notable finding of this study is that US
pension funds perform relatively poorly. They face
significantly higher costs than their peers in Canada,
Europe, and Australia/New Zealand, and their performance is weaker. This cannot be explained by size:
On average, the US pension funds in the sample are
relatively large. Part of the weaker performance can
probably be explained by the fact that they are much
less likely to opt for internal management than their
foreign peers.
In a well-known article, Lakonishok et al. [1992]
show that institutional investors tend to put more intermediaries between themselves and their assets after a
period of bad performance. According to Lakonishok
et al. [1992], despite higher costs and lower returns,
pension funds will prefer investing through external
management and fund-of-funds, as a way to shift responsibility for potentially poor performance to the external

40

manager, and even to shift the responsibility for poor
selection of managers to the fund-of-funds manager.
Especially for US pension funds that have experienced
dismal real estate performance during the financial crisis
of 2008–2009, the LSV trap is wide open. However,
this article suggests that additional layers of real estate
investment management are costly and are generally not
associated with better performance for pension funds.
So, the first practical implication of this article is for
pension funds to avoid disintermediation and to aim
for the short