What are we looking for?
Real estate equity funds that performed best through the past year. Now that the U.S. Federal Reserve has begun to pull back on its bond-buying program, and interest rates have begun to rise, is there still opportunity in this investment space?
The screen
We looked for the 15 real estate equity funds with the top returns for the year ended Dec. 31. U.S. dollar, segregated, pooled and duplicate versions of the funds were excluded. We also stripped out funds with a minimum investment of more than $25,000.
What did we find?
Staying away from North American real estate investment trusts (REITs) propelled the Manulife Global Real Estate fund to the top of the heap. It outpaced its competition with a gain of 18.2 per cent in the year.
The fund has been bypassing REITs for 18 to 24 months as they were increasingly bid up by investors seeking yield in a low interest rate environment. This helped investors avoid the pain many other funds experienced when REITs fell from favour after the U.S. Federal Reserve indicated it would ease up on its bond purchasing program.
"Instead, we benefited from strong performance across most of our holdings," said portfolio manager Ryan Dobratz. He attributes the fund's gains in part to investments in U.S. and British companies with strong ties to the residential market, such as home builders, timber companies and land developers.
"All of these companies went through very tough times, but their businesses are now on the mend, and they're participating in what is pretty much a broad-based recovery today," Mr. Dobratz said.
Timberland firm Weyerhaeuser Co., which is not only grows and harvests trees, but also makes products such as building materials, is one company that performed well in the second half of 2013. Mr. Dobratz also expects the company to do well in 2014 as it continues to divest some business lines to become more of a pure-play timber company.
He also sees positive performance ahead for Lowe's Cos. Inc. as U.S. consumers spend more on home improvement.
For investors who are looking at REITs, Mr. Dobratz says he would be focused on shorter term leases. "The reason being if we do get a recovery – if we get some inflation – you want to be in a company that owns hotel or apartment assets that can increase those cash flows," he said. "[Apartment owners] can capture some of that recovery by resetting rents after a year."
The fund also expects to benefit from a resurgence in merger and acquisition activity in 2014. "We have a number of companies in the portfolio we think would be desirable for a private equity group or a strategic buyer," Mr. Dobratz said.
The Renaissance Global Real Estate fund was the chart's second-best performer, climbing by 9.9 per cent in the period. The Fidelity Global Real Estate B rounded out the top three with an 8.2-per-cent gain in the period.