Trust Industry Research Articles

Old dogs and new tricks? The Law Commission's July 2006 Report on Trustee Exemption Clauses and the new STEP Rule of Practice

The trust is one of the greatest creations of English law and trust business is a very important part of the UK's professional service industry. Trust law is a multi-faceted industry dealing with varied subject matter in charitable, pensions, commercial and family contexts. I believe that it is vital that the UK trust industry continues to innovate, and that it retains the flexibility that so often provides it with a competitive advantage. These were the encouraging words of the Lord Chancellor, Lord Falconer, at the launch of the report by the Law Commission (LC) on Trustee Exemption Clauses (TECs) in July. When the Bill which became the Trustee Act 2000 was being debated in Parliament, Lord Goodhart expressed concern that it did nothing to restrict the use of TECs in trust instruments. In response, Lord Irvine (then Lord Chancellor) referred the matter to the LC for consideration. The LC's 124...

Comparing the Quality of Accruals for Alternative Summary Performance Measures in the Real Estate Investment Trust (REIT) Industry

This study examines Funds from Operations (FFO), a non-GAAP summary performance measure used extensively by the Real Estate Investment Trust (REIT) industry, by comparing the quality of accruals in FFO and in net income. Accrual quality is empirically evaluated from regressions relating accruals to past, present, future cash flows and changes in revenue, with larger residuals implying lower accrual quality. Results show that the accruals component of FFO is of higher quality than the accruals component of net income. The study then considers how the individual accrual items excluded from FFO, but included in net income contribute to the accrual quality differences of the two measures. I show that all these accrual items (including depreciation and some non-recurring accruals) are of low quality and are insignificant in predicting future cash flows. Since accounting depreciation is supposed to help match revenue with expenses, it is surprising to find that depreciation accruals are of low quality for the REIT industry. Further analysis on depreciation shows that the low quality of depreciation accruals for REIT firms is due to estimation errors and managerial manipulation and, to some extent, extreme changes in market inflation.

The unit trust industry in South Africa from 1965 to June 2005: are investors better off?

The vast global unit trust/mutual fund industry was worth more than $16 trillion by the end of June 2005. Over time, investors’ interests seem to have shifted from individual shares to share funds. The unit trust industry in South Africa is no exception. Over the 40‐year period from its inception in 1965 to 2005, the industry has grown from only one fund to 567 different funds, worth more than R345 billion. This study highlights some of the most important changes that have occurred in the South African unit trust industry over the last 40 years. These shifts are compared to changes that the USA mutual fund industry has experienced in the 60 years of its existence. An attempt is then made to answer the question whether South African investors are better off with these changes or not.

Performance, persistence and benchmarks of selected South African unit trusts for the period 1998-2002

Fund managers in the South African unit trust industry have an objective of generating strong alpha returns, meaning average annual returns above the respective benchmark. This paper analyses the performance of twenty South African unit trusts, selected from various sectors over the 1998 – 2002 period. In all cases the benchmark used by the funds is the Johannesburg Stock Exchange All Share Index. The well-known Capital Asset Pricing Model and a three-factor Arbitrage Pricing Theory model are used in the analysis. The result shows that only four funds of the twenty analysed were able to generate a superior performance in one or more years of the five-year period. Individual unit trusts were unable to perform consistently for any length of time. The failure of the funds to meet their objective is further analysed in terms of the appropriateness of the JSE All Share Index as the benchmark. In some cases the index was not an appropriate benchmark to measure persistence in performance and sector indices were preferable. In a cross-sectional portfolio analysis there was evidence of overall persistence in performance but this was of short duration, related more to negative than positive persistence in performance. Overall, the results of the analysis do not produce convincing evidence that unit trust fund managers were able to generate consistent above average returns to their investors. Furthermore, it may be preferable from an investor’s viewpoint if fund managers were to target an absolute rather than a relative benchmark.

The persistence of active fund management performance

This study focuses on the performance persistence of equity funds in the South African Unit Trust Industry against its appropriate index benchmark (ALSI) over the period 1988 to 2003. A few funds exhibited extraordinary persistence - either in out-performing or under-performing. In general it was found that over the short term (month-to-month and quarter-to-quarter basis) there was a tendency that the current performance of a fund would be repeated, with a greater tendency among the top performing funds to remain a top performer.However, when the persistence of fund performance was measured on a year-to-year basis, less consistency among funds was identified. The decile ranking movement of a fund - upwards, downwards or sideways - became more random in nature. When the forward-looking period was extended to three years, however, the chances that the fund would have stayed in the same decile became very slim.Herein lies the danger of placing your trust with one active manager only; over the long run the performance ranking of managers can assume a random nature if manager skill is not persistent.

REITs, IPO Waves and Long-Run Performance

The real estate investment trust (REIT) industry has undergone three waves of initial public offerings (IPOs) since 1980. In this article we examine these waves within the context of the general IPO wave literature. We note that the unique nature of REITs may render them more transparent than other stocks, and that this may affect their IPO performance. Specifically we document the initial and long-run performance of equity REIT IPOs during and after each wave, and we then examine which of the general IPO clustering and pricing theories best fits that performance data. We find evidence of much smaller initial returns than is typically found for non-REIT IPOs. We also find no evidence of the long-run negative abnormal performance for REITs that is normally found for other stocks. Our findings support the idea that the Capital Demand Hypothesis best describes the REIT IPO market, although we also find some weak evidence in favor of the Information Asymmetry Hypothesis. We find evidence against the Investor Sentiment Hypothesis.

The Performance of Acquisitions in the Real Estate Investment Trust Industry

This study examines the performance of acquisitions in the Real Estate Investment Trust (REIT) industry around the acquisition announcement and in the long-run. The results suggest that the acquiring REITs experience statistically significant negative abnormal returns while the target REITs earn statistically significant positive abnormal returns during the three-day period around the announcement. The long-run performance of the acquiring REITs is analyzed using size benchmark portfolios with the buy-and-hold, cumulative average and mean calendar time abnormal returns, as well as the Fama-French Three Factor Model. None of the other methods detect significant abnormal returns in the long-run with the exception of the buy-and-hold abnormal return. Further analysis shows that the long-run positive buy-and-hold abnormal return is consistent with an unexpected decline in cost of equity after acquisitions.

The Relevance of Earnings and Funds Flow from Operations in the Presence of Transitory Earnings

Executive Summary. The real estate investment trust (REIT) industry relies heavily on a cash flow-based measure of performance called funds flow from operation (FFO). FFO is the most widely used measure of performance for REITs, unlike other industries where earnings are used as a benchmark. This paper examines the role that earnings transitivity has on the value-relevance of FFO relative to earnings. The findings indicate that as earnings become more transitive, FFO gains value-relevance, while earnings lose value-relevance. Additionally, both FFO and earnings provide incremental information in the presence of the other.

Tax incentives for trust business and their impact on the trust industry in Singapore

Tax incentives for trust business and their impact on the trust industry in Singapore

Aggregate market returns and UK unit trust net acquisitions

Recent US research has focused upon the linkages between net mutual fund flows and their impact upon aggregate equity market returns. If a positive feedback relationship exists between investment flows and stock returns then there also exists the possibility that a market downturn or crash will be exacerbated by corresponding net outflows as mutual fund investors withdraw funds, forcing equity prices down further and thus creating a vicious circle. Using data from the UK we analyse the relationship between aggregate equity market returns and the net flows into UK unit trusts. We also undertake a similar exercise using UK bond market data. We trace our failure to identify a positive feedback relationship to the structure of the UK's unit trust industry. The fee structure, the relatively low minimum lump sum values, and the availability of regular savings unit trusts all combine to bring about a very low turnover of unit trust units in the UK.

Trust revisited: branding and PKI

For many years a mysterious paradox has plagued the Internet trust industry, says Peter Liss, CEO of Swedish PKI specialists AddTrust, in a paper prepared for this month’s Infosecurity Europe conference. Everyone needs enhanced trust, and the technology and techniques are mature and standardised — in other words supply is ready to sell, and demand is ready to spend. Yet, when examining the numbers, we can only conclude the two are not doing a very good job at meeting one another. Branding — as used in the credit card industry — could provide a significant bridge between supply and demand. Trust means different things to different people. For one community, ‘the trust industry’ is obviously all about technologies enhancing the privacy of personal data. For another it is about PKI. One reason that the trust industry — whatever that means — has taken such a long time to grow is that it is hopelessly fragmented. Privacy gurus don’t talk to consumer protection advocates, who don’t understand cryptographers, who in turn don’t see what trustmarks have to do with their industry. And yet, somewhere hidden among these people and their disciplines, lies the key to resolving the trust market paradox. As is not unusual in situations like these, each community has developed a special skill or an understanding that is crucial to the creation of real trust.

The Future of the Offshore Trust Industry: A personal view

The Future of the Offshore Trust Industry: A personal view

The Determinants of REIT CEO Compensation

Executive compensation has garnered much attention in the last decade from both academicians and practitioners. We examine the relationship between increase in CEO compensation, industry specific performance measures, and stock return for the years 1993-1999 in the Real Estate Investment Trust (REIT) industry. We find evidence that compensation evaluation is related to stock returns, and to changes in Real Estate Investment and Funds from Operation for the years 1997, 1998, and 1999. Furthermore, we document a negative relation between CEO raise and age. We find no link between compensation and Earnings per Share, whether the REIT is self-managed, or type of property in which the REIT specializes.

Institutional herding: Evidence from the South African unit trust industry

Extracted from text ... Number 55 - Part 2 S Gilmour and EvdM Smit Institutional herding: Evidence from the South African unit trust industry 1. Introduction The synchronous trading by institutional investors has interested market analysts, fund managers and academic researchers for some time. Recent research in this field has attempted to establish empirical evidence of so-called herding behaviour by institutional investors when trading securities. In addition to studying the presence of herding, most research has modelled the reasons that underpin its existence, and attempted to measure the impact of this phenomenon on share prices and equity market indices. This impact is in fact ..

An evaluation of financial globalization under fund‐manager capitalism: the case of the UK unit trust industry

Drawing upon evidence from the UK unit trust industry, this paper evaluates the extent and nature of financial globalization. It finds that despite this rapidly growing and prominent form of fund‐manager capitalism operating with increasingly mobile capital in a more inter‐connected deregulated world, this does not signal the advent of homeless capital and the end of geography.

Is Bigger Better? A Re-examination of the Scale Economies of REITs

Executive Summary. This study re-examines economies of scale for the equity real estate investment trust (REIT) industry, particularly the use of the translog model in empirical tests. Three cost functional forms are tested using data from 120 equity REITs in 1997: translog, simple quadratic and quadratic semi-log. The commonly utilized translog model is found to have little significance in explaining the scale effect, which suggests that the economy-of-scale parameter results derived from a translog model are irrelevant. However, the simple quadratic and quadratic semi-log functions are found to be significantly concave, supporting the existence of economies of scale in equity REITs.

An Evaluation of Financial Globalisation Under Fund-Manager Capitalism: The Case of the UK Unit Trust Industry

Drawing upon evidence from the UK unit trust industry, this paper evaluates the extent and nature of financial globalisation. It finds that despite this rapidly growing and prominent form of fund-manager capitalism operating with increasingly mobile capital in a more inter-connected de-regulated world, this does not signal the advent of homeless capital and the end of geography.

An Empirical Study of Derivatives use in the REIT Industry

We examine the use of derivatives in the real estate investment trust (REIT) industry. Tax considerations and speculative motives should not be important factors here, as REITs pay no corporate income tax and their speculative activities are limited by regulations. We find that 41 % of REITs use interest‐rate derivatives, although the amount of derivatives on average is not high. Our principal results are that larger REITs and mortgage REITs are more likely to use derivatives. However, in terms of the amount of derivatives, REITs that are smaller and have a larger amount of debt tend to use more derivatives. We interpret the results as evidence supportive of substantial entry costs for hedging and financial‐distress costs being a major consideration for the level of hedging. REITs with greater ratio of market to book value of assets also tend to use more derivatives. However, this result is not robust across different sample sets. We therefore view this as weak evidence supporting the agency‐cost explanation for hedging. Additional analysis on interest‐rate risk and hedging activities finds that mortgage REITs tend to increase their hedging activities when interest rates decrease, while the opposite is true for equity REITs. We interpret this as evidence consistent with prepayment risk being a major factor for mortgage REITs, while equity REITs primarily hedge to control funding costs.

The persistence of unit trust performance for the period July 1985-June 1995

The purpose of this study was to determine whether any persistence of performance existed in the unit trust industry in South Africa over the ten-year period from July 1985 to June 1995. Calculations were done over different time periods (one-, two- and four-year periods) and using different definitions of superior performance (positive Jensen alphas or winner/loser phenomena). Results of nominal returns and risk-adjusted returns were also compared. Results obtained show that persistence in performance does exist, but that it is more of a 'loser' phenomenon than a 'winner' phenomenon.

Managerial Style and Firm Value

This study analyzes the effect of managerial style on firm value by partitioning general and administrative (G&A) expenses in the real estate investment trust industry into a nondiscretionary “structural” component associated with the costs of asset and liability management and a discretionary or “style” component. The discretionary component is significantly related to at least one measure of style—specifically, the portfolio focus/diversification of the firm. Gross (project‐level) cash flows are invariant to the nondiscretionary or structural component of G&A but are positively related to the style component of G&A. The structural component has a negative impact on share price while the style component has a neutral impact. Therefore, for this industry, creating larger, less‐levered firms would result in enhanced value.