Journal of Real Estate Finance and Economics, 21:2, 113±140, 2000
# 2000 Kluwer Academic Publishers. Manufactured in The Netherlands.
Institutional Investors Tilt Their Real Estate Holdings
Toward Quality, Too
University of Wisconsin, School of Business Madison, WI 53706
JAMES D. SHILLING
University of Wisconsin, School of Business, Madison, WI 53706
This article con®rms and extends prior results regarding tilting of institutional investment in common stock
toward quality. The evidence presented here suggests that, while both real estate investment trusts and
institutional investors tilt their real estate holdings toward quality, the tilt is much more pronounced in the case of
institutional investors. Controlling for quality, there is further evidence that institutional investors overweight
locations where the share of local employment in business services, ®nance, insurance, and real estate, and
transportation is relatively high (compared to national averages). This evidence is consistent with the hypothesis
that signi®cant sector tilting by institutional investors is induced by the constraints of the prudent man rule.
In a recent paper, Del Guercio (1996) advances the idea that institutional investors
purposefully tilt their stock portfolios toward high-quality stocks. Her tests compare the
equity portfolio weights of bank managers on high-quality versus low-quality stocks to the
weights chosen by mutual fund managers. Del Guercio ®nds that bank managers tilt their
stock portfolios toward quality stocks more than mutual fund managers.
The Del Guercio study is motivated by the belief that it is not very important to anyone
but the plan manager (and, possibly, to pension bene®ciaries and to the government, if the
plan is government insured) how much market risk the private trust or pension fund stock
portfolio has. This is because the private trust or pension fund is a corporate asset and is
normally a relatively small part of the total value of the corporation. Moreover, since the
corporate shares are themselves owned by individuals who hold other assets in their
portfolios as well, corporate shareholders will simply take whatever risk they ®nd into
account in adjusting the risk of their total portfolio (see, for example, Black, 1976). The
plan manager, however, is potentially liable when an investment does badly.
consequence, plan managers have an incentive to protect themselves from liability by
tilting their portfolios toward high-quality assets that are easy to defend in court.