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A Non-Parametric Examination of Real Estate Mutual Fund Efficiency

Randy I. Anderson

Christopher M. Brockman

Christos Giannikos

Robert W. McLeod

Due to the recent lackluster performance in the stock market and low yields in the bond markets, investors have been looking for alternative investment opportunities. Publicly traded real estate investment trusts (REITs) have been a large beneficiary, receiving considerable flows of funds from investors looking for sustained and competitive yields and lower levels of investment risk. Many investors in the REIT market choose to participate via real estate mutual funds (RMFs), yet to date no research has focused on the efficiency in this arena. In this study, we employ data envelopment analysis (DEA), a non-parametric statistical procedure, to assess the relative performance of RMFs for the years 1997–2001. DEA is a procedure that tests whether decision-making units are operating on their efficient frontier, which requires minimum input usage for a given level of output, or vice versa. We find seven RMFs for 1997, three for 1998, three for 1999, four for 2000, and six for 2001 operating on the efficient frontier. Another result that we obtain is that by examining the mean inefficiencies of the input and output values, we determine the main sources of RMF inefficiency.

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