The overall record of the professional fund management industry supports the efficient market hypothesis. The majority of fund managers fail to match the market each year. Only a tiny minority have sustained outperformance for any period of time. However, the average performance of funds reveals more about the weight of institutional money invested in shares than the feasibility of producing above-average returns. As fund managers here and overseas control in excess of 80% of listed UK equities (ISE [1996, p. 6]), they are effectively the market. Thus it has been argued that, as the size of a fund grows and consequently its market influence, a fund manager's ability to outperform the market will diminish.5
In addition, professionals are more likely to be motivated by fear than greed. Their main aim is to avoid underperforming their competitors. Performing consistently well is also complicated by the fact that successful funds often attract new money more quickly than their managers can find `good' new investment opportunities (Bogle ). One of Foreign & Colonial's investment trusts found this in early 1993, often compounded by key personnel being tempted to leave (Foreign & Colonial ).
Although the hypothesis assumes that information flows efficiently, it is not the speed with which it travels but the reaction to it that is of importance. Two investors with the same information can arrive at different conclusions. The hypothesis also assumes that the market has no memory, but this cannot be as it is made up of individuals who remember. This makes ‘self-feeding’ - rational bubbles or exaggerated stock market movements - possible; see for example, Lewellen, Lease & Schlarbaum  and Mills .
Also, as the performance of funds and their managers are increasingly being judged in the short-term, it is becoming more important that managers are able to switch out of poorly performing assets into those with better performance expectations in the short-term. A recent example of this trend was the cut in the length of Foreign & Colonial's management contracts, from three to two years.
‘The move - which means Foreign & Colonial's fees for dismissal would shrink - follows growing criticism from shareholders and trust directors that high termination fees protect poor performing managers.’6
It is difficult to attain tactical asset allocation with real estate because of its lack of liquidity due, inter alia, to there being no centralised secondary market; see section 2.4.4. The ability to buy or sell an asset at a specific moment is important because returns often depend heavily on the precise times at which they are bought and sold. However, precise timing in direct real estate transactions is extremely difficult; see section 2.4.8.
In addition, the concept of pricing only systemic risk relies on a reasonably long in-vestment horizon; see section 4.4. Therefore, as investment horizons fall this will affect the quality of estimates of expected returns and asset correlation, as well as reduce the validity of assuming the multivariate normal distribution of returns. Thus, the reduction in investment horizon increases the influence of unsystemic risk, a point of particular relevance to real estate investment.
Institutions are traditionally nervous about holding larger proportions of an asset class or sub-class than their competitors. This applies especially to real estate because of its illiquidity. They are concerned about any inability to release capital, in order either to switch into other forms of investment or to match liabilities. As the average size of an institution falls and the importance of short-term performance is sustained, the negative attitude engendered by real estate's lack of liquidity is exacerbated; see section 2.3.3.
It is also of some importance for a fund to be consistently in the top performance rank, as the inflow of new money often depends on its rank. In addition, many managers are rewarded on the basis of their fund's ranking, although this method of compensation is changing. While this confers status on particular fund managers, it has led to benchmarking and what is often termed the ‘herd instinct’.
Institutions constantly monitor the exposure of competitors. Any movement of their own exposure from that of their peers is thought of in terms of risk. During the 1980's some individual funds appeared increasingly reluctant to take a long-term view, with its concomitant risk of falling from the top performance quartile in the short-term. To do so would put a fund at risk of failing to attract new money on the scale of those competitors more ‘successful’ in the short-term.
As a result, institutions are placing less weight on the long-term stability of returns, and relatively more weight on the short-term performance of portfolios. Fund trustees, by seeking quarterly performance targets, have helped to inculcate short-termism as a characteristic of institutional investment; see for example, Lee, Shleifer & Thaler , Thaler  and Dickerson, Gibson & Tsakalotos . As fund managers face shorter time horizons over which their performances are judged, they are increasingly forced to optimise their investment strategy in order to best meet these performance targets. Thus direct investment in real estate is perceived as having a reduced role due to its relative illiquidity, and in this pervading atmosphere is now seen as a less attractive investment than 20 years ago.
5This raises the issue of performance benchmarks, which is further discussed in section 4.5.6.
6Jeremy Tigue - a Foreign & Colonial Management director - as quoted in The Daily Telegraph 17th August, 1996 [p. B3].