Australian securitised property funds: Tracking error analysis and investment styles

In broad terms, the main aim of a securitised property fund is to replicate the essence of a particular property index. The success of constructing such a fund depends less on the absolute returns it produces, but rather, how closely the returns match those of the benchmark (e.g. S&P/ASX A-REIT 300 index). Based on tracking error analysis, this research identified a range of passive, structured and active investment styles in the selected 16 wholesale securitised property funds. Interestingly, over the 2000-2007 period, the tracking errors rankings of the securitised property funds appeared unrelated to other key investment performance measures. In part, this could be due to the poor performance of the active and some structured securitised property funds during times of major market downturns. This is evident in comparing cumulative downside returns with and without outliers. This research illustrates how tracking error can categorise a fund's investment style. Placed alongside the information ratio and other key investment measures, funds can be identified which consistently outperform the benchmark index. Further research is recommended as to the impact of different market conditions on investment performance measures, however these techniques are valuable decision making tools for an investment in securitised property funds.<p></p>