Our Favorite Real Estate Funds

http://news.morningstar.com/FundAnalystPicks/printNews.asp?id=SR

Return to: Previous Page

Our Favorite Real Estate Funds

by Andrew Gogerty | 03-19-09 | 09-22 AM

The current economic downturn makes it unlikely that REIT funds will perform well in the near term, but we think they're still helpful portfolio-diversification tools. After years of strong performance, real estate funds began to decline in 2007. That year, major REIT indexes shed nearly 20%. Then in the final quarter of 2008, REITs tumbled again, with the indexes dropping nearly 40% for the year. In the early weeks of 2009, REITs are down another 30%. The crash in REIT stock prices has made their dividend yields look quite juicy now. The trailing 12-month yield of the Vanguard REIT Index VGSIX, for example, is 9.8%. However, many of the index's prominent holdings recently have begun cutting their dividend. That will ratchet the yield down going forward, as the current yield doesn't immediately reflect dividend cuts. Thus, investors shouldn't rely on that yield statistic for predicting future fund dividend distributions. REIT funds may face further pain in the coming quarters. A slowing economy typically has a negative impact on occupancy rates as demand for office, industrial, retail, and apartment space declines. In addition, REITs no longer have access to the cheap financing they used to borrow significant sums of new money and expand their empires by acquiring property. Now, many of those holdings aren't worth what they paid and projected rental rates are not attainable. Dividend cuts, for many, are the most viable way to make the necessary principal and interest payments on their debt as refinancing and asset sales are proving extremely difficult. Real estate bulls say many stocks look cheap based on their historically low price/FFO multiple right now (a version of the P/E ratio). But with property values and occupancy rates falling and credit tough to come by, there's no reason to pile in. Still, we wouldn't eliminate an existing position. Most asset-allocation plans include a 5% to 10% invested in REITs. We'd lean more toward 5% now, but with an eye toward building it up slowly over the next couple of years. We stand behind our Analyst Picks as the best options in the category.
Analyst Picks: Category YTD Return (%) JPMorgan U.S. Real Estate A -29.84 3-Year Return (%) -26.05 5-Year Expense Return Ratio (%) (%) -7.03 1.18

SUSIX 1
T. Rowe Price Real Estate -28.21 -25.49 -7.05 0.75

TRREX
Average
1 Fund has a front load.

-24.9

-24.7

-8.1

1.42

Returns through 3/18/2009.

JP Morgan U.S. Real Estate SUSIX This fund employs a double-barreled research approach, first assessing macroeconomic conditions to evaluate real estate's subsectors and property types and then applying fundamental analysis to choose the best securities. It typically holds a concentrated portfolio, preferring to manage risk with its valuation techniques instead of with diversification. This makes mistakes more costly but success more pronounced when the managers get subsector

1 of 2

6/14/2009 1:10 PM

Our Favorite Real Estate Funds

http://news.morningstar.com/FundAnalystPicks/printNews.asp?id=SR

and stock picks right. We think that the experienced management team and deep research resources will allow this fund to maintain its strong record. T. Rowe Price Real Estate TRREX Manager David Lee has run this fund from its inception in late 1997. Lee employs a straightforward approach, analyzing REITs from both cash-flow and net-asset-value perspectives. He controls risk through subsector and geographical diversification. He also takes management skill into consideration, because real estate operators must be skilled asset allocators. Long-term investors should be rewarded by his emphasis on total return.

Return to: Previous Page

2 of 2

6/14/2009 1:10 PM