2015 U.S. Lipper Awards focus on funds with steady returns
(Story refiled to correct spelling of Hotchkis in final paragraph)
NEW YORK Since the start of the year, U.S. investors have poured money into foreign real estate funds at the fastest rate since 2007.
About $2.6 billion has flowed into mutual funds and exchange traded funds that primarily invest in real estate abroad during the first quarter of the year, according to Lipper, a Thomson Reuters company.
While not on pace to break 2007's record first quarter total of $5.3 billion in new investments, the jump is a sign that investors have been enticed by low prices for quality properties in Europe and the potential for growth in Asia and Latin America.
Currency fluctuations, tepid global growth rates and the difficulty for foreigners in understanding conditions in local property markets can derail even professional real estate investors. And some prices abroad aren't the bargains they once were.
The FTSE EPRA/NAREIT Developed ex-US Index, a benchmark of real estate investment trusts (REITs) in developed nations outside the United States rose 38.6 percent last year, roughly double the return of the U.S. REIT market.
With that in mind, here is how three winners of the 2013 U.S. Lipper Fund Awards are playing the global real estate market now.
DFA GLOBAL REAL ESTATE SECURITIES PORTFOLIO
Dividend yield: 4.2 percent
Annual costs: $0.32 per $100 invested
The $1.5 billion DFA Global Real Estate Securities Portfolio focuses more on asset allocation than buying and selling individual securities.
The fund is actually a fund-of-funds, which means that 60 percent of its assets are invested in DFA's Real Estate Securities I, a separate fund that invests in a broad selection of U.S. real estate investment trusts. The other 40 percent of assets are invested in DFA International Real Estate Securities, a separate fund that invests in REITs and equivalent holdings overseas. Three years ago, the allocation between the two was evenly split, but has since tilted more to the United States, said fund manager Joseph Chi.
The broad approach is in line with the philosophy of Austin, Texas-based fund company Dimensional Fund Advisors, which believes that markets are efficient and that stock picking does little to add long-term value for investors. While the funds are not labeled index funds, they tend to be passive and screened for risk and other factors. The portfolio span 22 countries from Mexico to Malaysia to the UK, and it does not invest in housing or developers.
"People are realizing there's a whole universe of non-U.S. REITs," said Chi. "Up until the early 2000s, there really wasn't much in terms of REITs outside the U.S."
Twenty-seven countries outside the United States, such as Bulgaria, Pakistan and Australia, have adopted the U.S. approach to REITs, according to the National Association of Real Estate Investment Trusts. Another seven, including China, India, and Vietnam, are considering doing the same.
The fund takes a buy-and-hold approach, so turnover of portfolio holdings is under 10 percent each year. Some of the larger foreign REIT positions in Chi's fund include Westfield Group, an Australia-based, shopping center developer with extensive U.S. investments, which yields 4.3 percent, and Land Securities Group Plc, which operates offices as well as shopping centers in the United Kingdom. It sports a yield of 3.4 percent.
For the three years ending February,2012 the fund rose an annualized 17.8 percent a year, while its benchmark, the S&P Global Real Estate Index, gained 16.9 percent over the same time.
EII INTERNATIONAL PROPERTY FUND
Dividend yield: 2.45 percent
Annual costs: $1 per $100 invested
The $744 million EII International Property Fund takes a concentrated approach, typically investing in 40 to 60 companies in regions that can be difficult for outsiders to understand.
"We position you in world markets where there's high growth but difficult access," said James Rehlaender, managing director of European Investors Inc, which is based in New York.
Overall, more than 70 percent of the fund is invested in Asia. Similar funds tend to hold about 40 percent in Asia.
Big holdings in the region include Kerry Properties Ltd, a Hong Kong-based developer of retail and mixed-use projects throughout Hong Kong and China that yields 2.7 percent, and Aeon Mall Co Ltd, a Japan-based shopping center operator whose dividend yield has fallen to 0.6 percent after its share price jumped 84 percent over the last year. Two of its Japanese holdings - developer Mitsubishi Estate and developer Mitsui Fudosan Co, Ltd. - have each jumped more than 40 percent since the start of the year as a result of the Bank of Japan's introduction of a massive stimulus program.
EII International Property received a Lipper award for its five-year performance among international real estate funds. From 2008 to 2012, it rose 1.35 percent annually vs its benchmark FTSE EPREA/NAREIT Developed ex US Index, which was a negative 1.14 annually.
Turnover is low, at about 15 percent annually.
FORWARD INTERNATIONAL REAL ESTATE FUND
Dividend yield: 3.51 percent
Annual cost: $1.77 per $100 invested
Forward International Real Estate Fund limits its investment to key international cities, avoiding bigger names for overlooked public companies. Portfolio turnover is about 200 percent, meaning that through the course of the year, the fund would have sold everything twice.
"Because the stocks themselves are a little volatile, they tend to run up and fall back down," said Michael McGowan, portfolio manager. "If something basically reaches what we think it is worth or more, we'll sell it and that's been actually helping returns."
Some 40 percent of the $200 million portfolio is invested in the Asia-Pacific region with a "boots on the ground approach." McGowan and his research team make extensive site visits to hundreds of properties in Hong Kong, Guangzhou, Tokyo, Singapore, Manila, Kuala Lumpur, Sydney, Brisbane and Melbourne. The fund's largest holding, at 10.2 percent of assets, is CSI Properties Ltd., which develops commercial properties in Hong Kong and Shanghai and is up 12.7 percent for the year.
Forward International Real Estate received a Lipper award for its three-year returns. Its institutional shares were up an annualized 19.91 percent over the three years that ended in February, while shares for retail investors, Class A shares which require a smaller minimum investment, rose 19.6 percent over the same time frame. During that time, its benchmark, the FTSE EPRA/NAREIT ex-US Developed Index rose an annualized 13.6 percent.
(Editing By Lauren Young and Leslie Gevirtz)