By studying a database of 884 pension funds over a 20-year period, the authors investigate pension funds’ real estate investments and the performance of these strategies. Funds can invest in properties directly and manage the assets themselves (i.e., internal management) or have the assets managed externally. Alternatively, funds can invest in real estate indirectly via property management companies and such listed securities as real estate investment trusts.

Direct investment with external management tends to be more popular in the United States and to have higher costs, measured as a percentage of real estate assets under management, than any return generated in excess of a benchmark. Furthermore, the cost of external management increases as the fund size decreases, making such an arrangement much more expensive for smaller funds. The authors suggest that larger funds consider internal management and that smaller funds either find a mechanism to allow internal management of real estate assets or consider investing indirectly via property management companies/securities.

Practitioners will benefit from the authors’ conclusion that the most cost-effective way to invest in real estate is to be as administratively close to the cash flows as possible and to be in a larger pension fund. Internally managed real estate in larger funds is the least expensive, and the costs associated with internal management in a larger fund do not completely erode the return in excess of a benchmark.

Smaller funds could join together into larger investment entities, which could then internally manage real estate assets in a cost-effective manner, or choose to invest indirectly in real estate, where there is no management cost.

The authors use a database of 884 funds, of which 536 are US funds and 244 are Canadian funds, covering the period of 1990–2009. An additional 114 funds are from Europe, Australia, and New Zealand. A great deal of the research is performed by cutting the data into quintiles, usually based on size, and performing a similar analysis with US and non-US funds separated. Performance is measured with cross-sectional means by using statistical testing. In some cases, the variation in the data within a quintile is so large that statistical significance cannot be found.

I like that the authors focus on pension funds’ real estate investments and that they provide enough results to warrant/encourage further study. But I do not find the study and its conclusions thoroughly convincing because I want to know what causes external management to be so expensive relative to the value delivered. Is it a result of noncompetitive fees, a lack of sufficient expertise, or some other factor?

I cannot fault the authors for this problem because the data available in the study cannot begin to answer this question. But perhaps the next iteration of research in this area can focus on this issue.