What are we looking for?
Rocking real estate funds in the recent rally.
The sector has been rebounding after being crushed last year on concerns about the economic downturn and ability of firms to obtain financing.
Today's search
We screened for the best-performing real estate equity funds this year until Thursday. We excluded the U.S.-dollar and duplicate versions of the funds.
What did we find?
The iShares CDN Real Estate Investment Trust (REIT) exchange-traded fund is the leader with a robust 29-per-cent gain.
This ETF aims to track the S&P/TSX capped REIT index. It includes four securities that have a double-digit weighting in that benchmark.
RioCan Real Estate REIT makes up 25 per cent; H&R REIT, 15 per cent; Canadian REIT, 12 per cent; and Boardwalk REIT, 10 per cent.
While it has become fashionable to knock active managers for not being able to beat indexes, keep in mind that they are not allowed to invest more than 10 per cent of their fund assets in any one security.
Funds invested in mainly Canadian real estate securities rose to the top of the performance chart, while their peers investing globally have had to contend with currency issues in translating the assets into Canadian dollars.
The strong loonie versus the U.S. greenback has dragged down the returns of globally oriented funds. AIC Global run by Michael Winer at New York-based Third Avenue Asset Management LLC is up 15.7 per cent this year, while its U.S.-dollar version has gained 29 per cent.
IA Ecoflex Real Estate Income, a segregated fund, has risen 26.6 per cent this year, while Sentry Select REIT is up 18.6 per cent.
The rally in the real estate sector since March has been fuelled by the fact that many REITs have been able to reduce their leverage partly by issuing stock and using proceeds to pay debt, said Dennis Mitchell, manager of Sentry Select REIT.
“People realized that these names are not going to zero and are going concerns,” he said.
The other big risk is in terms of occupancy rates and cash flow generation because real estate is a “lagging sector” in that it takes a while for leases to come up for renewal, companies to give up space due to downsizing and rents to fall, he said.
U.S. REITs have suffered major declines in cash flow per unit in the second quarter, but that has not been the case in Canada except for the hotel REITs, Mr. Mitchell added.
The manager expects a possible market downturn this fall as investors take profits from healthy gains. “Equity markets don't go straight up,” he said. “But we are not going to revisit the March lows. I think we are well past that.”
