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REITs



Real estate funds have been in the dog house lately. As under performers in a market in which technology reigns and interest rates are moving ahead, some investors might wonder about what, if any, value they could add to their mutual funds portfolio. Listen to this portfolio manager's story and you might see things differently.

Rick Imperiale is the portfolio manager of the Forward Real Estate Investment Fund, (800-999-6809). Although the fund hasn't been around for long, it was just launched last May, Imperiale has. In 1984, he founded Uniplan, Inc., a Milwaukee, Wisconsin-based investment advisory firm that maintains a database of property ownership of 150 publicly traded equity Real Estate Investment Trusts, (REITs). and uses quantitative screening techniques when making its portfolio selections. Here's his take on the benefits of investing in real estate funds.

DV: Why ought anyone consider an investment in a real estate mutual fund?

Imperiale: Real estate investment trusts behave very independently from both stocks and bonds and because of that are considered a low correlation asset class.

We know traditionally that real estate has always been a favorite among large institutional investors because of this low correlation. And when we address the issue of why would you want to own real estate in your fund portfolio, the answer, from a quantitative point of view, is because it has that low correlation to both stocks and bonds. As a result, they can help moderate risk.

DV: What percentage of real estate assets do investors need to moderate risk in their portfolios?

Imperiale: When you run the numbers, it's somewhere between 5 and 15 percent.

DV: And what would that amount do?

Imperiale: In most portfolios, it will lower what's called the standard deviation of return. In other words, the up and down moves in the portfolio. And, it will also increase the total return. So, you lower your risk and you increase your total return.

DV: About how much of a difference could that make in the overall total return of someone's portfolio?

Imperiale: That's hard to say because it basically depends upon your portfolio and the holdings already in it. And of course, the performance of the real estate fund. But generally speaking, you could probably lower your portfolio risk by about 10 percent and increase your portfolio return by about one-half to 1 percent.

DV: That doesn't sound like much.

Imperiale: It's not that you get this huge increase in returns, but when your portfolio goes down it will probably go down something like 10 percent less than it would have if you didn't own the real estate. And when it goes up, it generally goes up a little bit more than if you didn't have the real estate there. That's why we see it as a positive attribute in your portfolio.

DV: With interest rates going up, doesn't that make real estate an untimely investment?

Imperiale: When you study the impact of interest rates on REITs, what you find is when interest rates begin to go up, there is a short period of time when they have a negative impact on the value of REITs as prices tend to go down a little bit or remain flat in a rising interest rate environment.

Then what happens is, if in fact it looks like there is a high degree of certainly that rates are going higher because there is a problem with inflation, REITs tend to start behaving very well. I would argue then that maybe during January of this year there was a little bit of that psychology beginning to instill itself in the real estate sector.

DV: Are there any values to be found in the REIT market these days?

Imperiale: As an asset class REITs have been trading at a substantial discount to the underlying real estate they own. At the end of last year, the typical equity REITs was trading at a 15 to 18 percent discount to its liquidation value. So literally, it's the sort of thing where you can buy real estate on Wall Street cheaper than you can buy real estate directly.

DV: What do you think is the most misunderstood thing about REITs?

Imperiale: I think it's expectations. Shareholders don't always understand the benefit of adding REITs to their portfolios. Many think that if they can't get a 30 or 40 percent return from an investment it isn't worth it. They misjudge the total return profile of real estate and when you look back historically, REITs have had very respectable returns.

To learn more about REITs visit the National Association of Real Estate Trust web site at www.nareit.com.

To read more articles, please visit the column archive.




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