Evaluating the Cost of Managing Real Estate Mutual Funds

Abstract

We investigated the relationship between real estate mutual fund expense ratios, advisory fee, and total assets managed by real estate mutual funds. We also evaluated if cost efficiencies in management (dollar operating cost as well as advisory fee) were associated with scale in real estate investment trusts (REITs), our results showed that dollar cost increases in real estate mutual funds were less than proportionate to increases in assets, suggesting economies of scale for real estate mutual funds. Average cost elasticity for funds varied depending upon fund size, index versus non-index fund, institutional versus retail funds, global versus US real estate funds, and share class of funds. Cash flows were negatively related to the cost of managing a fund. We also found cost efficiencies in the advisory fee charged by real estate mutual funds contributed to economies of scale in the overall cost of fund management.