State of active management in global REITs funds
Active fundamental management profile in global REITs funds migrates to lower active share.
No meaningful active positions in the large-cap, liquid segment with only half of alpha opportunity utilized by most funds.
Active Share in global reits funds since 2020
The opportunity set to pursue outperformance is given by a benchmark and therefore the entire benchmark provides equal opportunity for alpha generation. If some parts of the investable universe (benchmark) is not utilized or not utilized efficiently for alpha generation it creates structural limitations to potential outperformance, the opposite of active management.
There can be a number of dimensions for which investors may wish to evaluate if portfolio construction efficiently optimises alpha capture. One such dimension is market-capitalization. This is important as it is directly related to size and liquidity of any views a manager might want to express. We define three segments of the investable universe, large/mid/small-caps being 1/3rd of the benchmark by market cap of constituents (starting with the largest constituent’s weight). This effectively splits the above active share of each fund into how it is composed conditional on market-capitalization and gives more detailed view of how managers seek to utilize the opportunity set to outperform.
Active Share by market-cap segment
As the chart illustrates, proportion of active share in large and liquid stocks is low (below active profile level definition of at least 50% active share) and has declined significantly since 2020, standing currently at only half of available alpha opportunity of the segment. The mid-cap segment has a fully active profile around 60% and small-caps have the highest around 80%; the reason for this is that global reits benchmarks have a long tail of small-caps and managers typically only hold a limited number of those.
The issue for investors is that if fundamental managers structurally do not pursue alpha in large and liquid stocks, arguably the most efficient segment to express expertise and convictions, and only get largely “closet-indexed” exposure in 1/3rd of their allocations, it might be more efficient to only give fundamental managers mandates that exclude the large-cap segment and instead index the large-cap segment.
Solution to optimal and consistent alpha generation
Kania Global Real Estate CAI index (CAI stands for Consistent Active Indexing) is structured to solve for this inefficiency in portfolio construction.
The index is an alternative-beta based on a data-driven, systematic process and is structured to provide consistent 50% active share exposure in each market-cap segment at all times. For information about the index please see
PDF Kania index information
PDF Kania index vs private real estate
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