Factor Investing in Financials, Real Estate & MLPs

Do Unique Sectors Offer Attractive Alpha Opportunities?

February 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Beating benchmarks is challenging for fund managers, even in unique sectors
  • Factor performance in financials, REITs, and MLPs is comparable to the cross-sector factor returns
  • Classic factor investing strategies are likely more attractive than industry expertise


Stating that active managers have a performance problem would be a slight understatement, especially if the benchmark is a large liquid index like the S&P 500. The SPIVA scorecard from S&P Dow Jones highlights that U.S. large cap equity fund managers dramatically underperform their benchmarks, regardless over which time frame this is measured.

Perhaps markets have become too efficient for fund managers to generate any alpha, at least after fees. However, some sectors require more industry knowledge than others and might provide more opportunities to create alpha. Analyzing banks, insurance companies, real estate investment trusts (REITs), and master limited partnerships (MLPs) typically involves using unique metrics like funds from operations and renders other standard metrics, like EBITDA in the case of financials, redundant.

Although the SPIVA scorecard does not have data for financials or MLP fund managers, it does for the real estate sector.  The scorecard shows that real estate equity fund managers underperform almost as dramatically as their large cap brethren. More than 80% fail to beat their benchmark over a 15-year timeframe (try Finominal’s Alpha Analyzer for alpha and contribution analysis).