An Investigation Into South African Property Unit Trusts: Do Active Managers Add Value To Investors?

Abstract

Active vs passive management is a central debate within asset management, with active

managers promising superior market beating performance after fees through their superior

knowledge and stock selection. This study investigates the performance of 34 South African

property unit trusts over multiple periods between 2005 and 2018. Fund performance was

evaluated using three risk-adjusted measures, namely the Sharpe ratio, information ratio and

Jensen’s alpha, in order to determine whether there is significant outperformance amongst the

funds. The benchmark used to compare performance was the South African Listed Property

index (SAPY), which is the most common and well established proxy for the South African

property market. The sample was divided into three periods, long term 2005-2018, medium

term 2008-2018 and short term 2015-2018.

In all periods, outperformance of active funds were shown to be inconclusive, with only a small

number of funds showing significant positive alphas and significantly high Sharpe and

information ratios. A small number of funds achieved outperformance across multiple periods.

On average significant outperformance was uncommon and inconsistent. Furthermore, a

number of funds achieved significant underperformance over multiple periods, with inferior

risk-adjusted returns and alphas compared to the benchmark. However, the volatility of fund

returns were shown to be less than the benchmark on average in all periods, indicating that

active managers were able to reduce volatility compared to the benchmark. In the more recent

short term period, performance of the active funds were especially low with many negative

alphas’ present. The best performing fund across multiple periods was shown to be a risk parity

portfolio of property stocks, which achieved significantly higher returns whilst having lower

volatility than the benchmark and other funds.

Ultimately the results suggest that active managers in the sector do not provide sufficient

evidence for outperformance. Hence investors are better of making use of passive indices or a

risk parity portfolio if they are looking for exposure to South African listed property. This is in

line with other international studies which have also found that active management in the

property industry does not provide significant and consistent outperformance. These results

provide useful insight to property investors in South Africa and contribute to the debate

between active vs passive management within the financial literature.