Alternative Benchmarks for Evaluating Mutual Fund Performance

While real estate investment trusts (REITs) have experienced very high growth rates over the past 15 years, the growth in mutual funds that invest in REITs has been even more dramatic. REIT mutual fund returns are typically presented relative to the return on a simple value-weighted REIT index. We ask whether including additional factors when benchmarking funds' returns can improve the explanatory power of the models and offer more precise estimates of alpha. We investigate three sets of REIT-based benchmarks, plus an index of returns derived from non-REIT real estate firms, namely homebuilders and real estate operating companies. The REIT-based factors are a set of characteristic factors, a set of property-type factors and a set of statistical factors. Using traditional single-index benchmarks, we find that about 6% of the REIT funds exhibit significant positive performance using traditional significance levels, which is more than twice what random chance would predict. However, with the multiple-index benchmarks that we prefer, this falls considerably to only 0.7%. In addition, we find that these sets of factors and the non-REIT indices better explain the month-to-month returns of the REIT mutual funds. This suggests that investors or researchers evaluating REIT mutual fund performance may benefit from a multiple-benchmark approach.     

An Entrepreneur's Guide to Understanding the Cost of Venture Capital

Entrepreneurs who deal with a venture capital firm (VC) for the first time often find themselves unprepared for the experience. The deal structure language used to describe financing terms, and the methods used to value the investment, are unique to the VC world. The authors have two objectives in preparing this entrepreneur's guide to venture capital finance: First, they explain why VCs require rates of return that are considerably higher—even after adjusting for difference in risk—than the returns required by the shareholders of established companies. Their explanation focuses on differences of opinion between overly optimistic entrepreneurs and less sanguine VCs. Second, the authors discuss the difficulty faced by entrepreneurs when trying to understand the actual cost of VC financing (including the dilution of value that occurs when entrepreneurs fail to meet targets or milestones). The problem can be traced to deal structure terms that typically call for the VC to receive preferential treatment in the event the entrepreneur's scenario does not turn out to be accurate. More specifically, entrepreneurs often grant VCs control rights as well as liquidation rights that, when things go wrong, dramatically increase the effective cost to entrepreneurs of venture financing.     

Revealing the screening: organisational factors influencing the recruitment of immigrant professionals

Little attention has been paid to factors that influence employers in their recruitment behaviour, especially as it affects immigrants. In order to address this gap in the literature, a case study of regional Australian employers is used to examine how organisation-based factors influence the employer screening and recruitment of immigrant professionals. The findings indicate that employers are not primarily driven by a human capital lens during the recruitment process. Rather they seem to be influenced by the place and specificity of the process. Some of the key factors which can either favourably or unfavourably influence employers include the organisational size, type, resource availability, ethnic diversity of clients, level of role criticalness, industry-based culture and management style.     

The Cross Section of Expected REIT Returns

In this study, we examine the cross-sectional determinants of expected REIT returns. We examine both the pre- and post-1990 periods, since the structure of the REIT market changed substantially around 1990. The determinants of expected returns differ between the two subperiods. In the pre-1990 subperiod, momentum, size, turnover and analyst coverage predict REIT returns. In the post-1990 period, momentum is the dominant predictor of REIT returns. Given the strength of the momentum effect in the post-1990 period, we examine it in great detail. For the whole period, and for the post-1990 period where the momentum profit is strongest, our evidence is generally consistent with the studies on common stocks other than REITs. The only striking exception is that we find that momentum is stronger for the larger REITs rather than for the smaller REITs. In our multiple regressions that include the characteristics as well as interactions between past returns and firm characteristics, the turnover–momentum interaction effect provides the most significant results. More specifically, momentum effects are stronger for more liquid REITs.     

Managing Oil Price Risk in Developing Countries

This article presents a simple framework for understanding theimpact of oil dependence on growth in terms of an optimal savingsand investment strategy. Among the more important factors underlyingthis strategy is the extent to which oil price changes are temporaryor permanent. This in turn determines whether a country shouldrely on stabilization and savings funds or the use of financialinstruments to manage oil revenues—or both. Country experienceswith stabilization and savings funds are surveyed, and the caseis presented for using financial instrument to manage oil pricerisk. Policy implications for enhancing the use of financialinstruments are explored, including an expanded role for internationalfinancial institutions.      

Determinants of Credit Spreads in Commercial Mortgages

This article examines the cross-sectional and time-series determinants of commercial mortgage credit spreads as well as the terms of the mortgages. Consistent with theory, our empirical evidence indicates that mortgages on property types that tend to be riskier and have greater investment flexibility exhibit higher spreads. The relationship between the loan-to-value (LTV) ratio and spreads is relatively weak, which is probably due to the endogeneity of the LTV choice. However, the average LTV ratio per lender has a strong positive relation with credit spreads, which is consistent with the idea that lenders specialize in mortgages with either high or low levels of risk, and that high LTV mortgages require substantially higher spreads. Finally, we observe that spreads widen and mortgage terms become stricter after periods of poor performance of the real estate markets and after periods of greater default rates of outstanding real estate loans.