An Empirical Investigation of the Role of Legal Origin on the Performance of Property Stocks within the Context of a Tactical Asset Allocation Strategy

Abstract

The role of legal origin was first introduced in the Law and Finance Literature by La Porta et al. (1997) in an original study of legal determinants of external finance. Their study is timely given that investor protection is crucial because in many countries, expropriation of minority shareholders and creditors by controlling shareholders or corporate insiders is extensive. This dissertation intends to replicate the original La Porta et al. (1997) study for Property stocks in 23 countries whose legal jurisdictions falls into the four of the legal fraternities established by La Porta namely, English, French, German and Scandinavian. The primary motivations for this thesis, is that the Property stocks broadly captures several critical aspects of the original La Porta study. Specifically, Property stocks are very tangible assets that can easily be collateralised due to the direct property underpinning the net asset backing of Property stocks.

The end result of this research endeavour is to provide a framework for institutional portfolio investors to determine the appropriate countries whose real estate markets have the most favourable investor climate to facilitate a more attractive environment for institutional investors given the Means Variance Optimisation (MVO) methodology. A tactical asset allocation strategy will be employed to determine the three stages that a global investor should undertake to arrive at the optimum proportions of funds to invest in Common stocks or Real Estate stocks in any country firstly based on an Emerging/Developed country analysis then secondly, a geographic Regional analysis and finally on Legal Origin analysis to distil the appropriate proportions of funds that should be invested.

This Dissertation has three original contributions, which are as follows:

1) An Empirical investigation of role of Legal origin on the performance of Real Estate stocks within the context of a tactical asset allocation strategy. This dissertation studies the impact that Developed versus Emerging, Regional markets and Legal Origin jurisdictions have on the results of the optimal MVO portfolios (based on the highest Sharpe ratio) and presents the research findings of this study, at the Primary, Secondary and Tertiary levels. This dissertation is envisaged to fill the research gap between legal origin and the performance of Property stocks across four legal fraternities in 23 countries and make an original contribution in the Law & Finance and Portfolio Management Literature.

2) ACTIVE (Ex-Ante) versus PASSIVE (naïve) portfolio management strategy. The original contribution is the application of this methodology to property stocks specifically within a Legal Origin and Regional market framework. Data is collated from 1984 to 2003 (20 years inclusive) from 23 countries with specific reference to the Common and Real Estate stocks markets therein. A 5 year rolling Ex-Post analysis is computed to determine the optimum allocation weights in a multi-asset portfolio and subsequently an Ex-Ante analysis (next immediate year) of the portfolio weights applied to an Actively managed portfolio. This portfolio will be compared with actual portfolio performance from 1989 to 2002 (fifteen subsequent years) to determine whether the Ex-ANTE methodology which underpinned the Active management strategy is preferred over a Passive (equal investment in each asset class) strategy for real estate stocks portfolio management. The Ex-Ante analysis will be undertaken at two stages: Firstly, Legal Origin markets and Secondly, Regional markets.

3) A replication of the Gordon et al. (1995) study which determined the appropriate percentage based on the Markowitz Portfolio Theory (MPT) that should be invested in the Real Estate stock markets in 14 countries. The original contribution is the application of Gordon’s methodology to the Legal Origin markets proposed by La Porta et al. (1997). This research study encompasses 23 countries whose legal jurisdictions are derived from English, French, German and Scandinavian legal families. The legal frameworks are crucial in determining investor protection and consequently the likelihood for greater investor participation in the respective property markets.

About the Author

Dr. Christopher K.L. Shun is the Deputy Group Managing Director of Menang Corporation (M) Berhad (MCB), wherein he supervises the total financial and operations of the Group, reporting directly to the Board of Directors. He sits on the Audit Committee and is also a member of the Remuneration Committee representing the Management to the Independent Non-Executive Directors with respect to Corporate Governance and Personnel matters.

Dr. Shun, initially graduated from Boston University, U.S.A with a Bachelor of Science in Business Administration, (Summa Cum Laude) and a Bachelor of Arts in Economics, (Magna Cum Laude) in 1987. He then pursued a Merchant Banking career with Hill Samuel Bank, London. His work experience included designing valuation models for US Fortune 500 companies, property development consulting for the British Broadcasting Corporation (BBC) and conducting market entry studies for Australian property PLC’s into the United Kingdom. In 1988, he was sponsored unto the one-year Corporate Finance Executive (CFE) programme at the London Business School, U.K. In 1989, he returned to the US to pursue the Master of Science in Management from the MIT SLOAN School of Management, U.S.A. Upon graduation, he joined Bankers Trust International Limited, London as a Merger and Acquisition Associate wherein he authored an internal cross border Europe-Asian Economic Survey for Bankers Trust International Ltd. He was part of the transaction team involved in the BASF (US) US $250 m divestiture and was responsible for the handling of the entire Property portfolio of the late Robert Maxwell of the Mirror Group PLC. He was awarded the Advanced Postgraduate Diploma in Management Consultancy (Adv.Dip.C) from Henley Management College, U.K. in 2000. He qualified in early 2003 as a Certified Financial Planner (CFP ®), a US Financial Planning certification, and Dr. Shun is the only PLC Director to hold the Individual Financial Planner license issued by the Securities Commission (SC) of Malaysia. He completed the Doctor of Business Administration (D.B.A) at Henley Management College, which is awarded by Brunel University, U.K. in 2004. His Doctoral Dissertation won a competitive scholarship for a 3 week Advanced Management Programme at Henley Management College.

Dr. Shun has published two academic papers entitled “Risk Management for Property Development” @ July 2000 and the “Risk Factors for Asian Property Investments: A Case for the Malaysian Property Trust” @ July 2002. His two papers are listed in www.amazon.co.uk. His area of research is in Property Risk Management, Portfolio Management and Property Finance. He has published six articles in the EDGE WEEKLY, a regional Malaysian and Singaporean financial weekly, and he also regularly writes for the Journal of Malaysian Financial Planning.

Dr. Shun has been a conference speaker for the Chartered Institute of Management Accountants (CIMA), Construction Industry Development Board of Malaysia (CIDB), Malaysian Institute for Corporate Governance (MICG), National Property Development Conference (NPDC) – voted “Best Speaker” and the Financial Planning Association of Malaysia (FPAM) concerning Risk Management and Property Trust (REITs) Management. His Risk Management paper and methodology has been used by the Euromoney Training UK (a division of Euromoney Institutional Investor PLC), United Kingdom.

Dr. Shun is regularly featured by Bloomberg TV on such matters as Property Trusts, Property Risk and Property Finance. He presented a paper entitled “Lifestyle Implications for the 21st Century” at the Multimedia University, Malaysia in 2004 as a blueprint for responsible and sustainable development in Emerging nations. He was invited to accompany the previous Prime Minister of Malaysia, Tun Dr. Mahathir Mohamad and Tan Sri Noor Yakcop (Second Finance Minister and architect of the Malaysian fixed peg) as a conference speaker for the 2005 CFO conference organised by the Federation of Public Listed Companies (FPLC) in May 2005.