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Until about three years ago, industrial real estate was the “neglected, poor stepchild” of the real estate sector, says portfolio manager Dean Orrico.

“It was relatively low-growth, dull and boring,” says Mr. Orrico, who is also president and chief investment officer at Middlefield Capital Corp. in Toronto.

Then e-commerce started to pick up, driving demand for warehouse space, as well as the need for data centres to house the rise in online information across sectors. Suddenly industrial real estate investment trusts (REITs) and stocks rivalled their office and residential peers.

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The pandemic has since pushed industrial REITs to the forefront of the sector as demand for online services surges, while the retail and office sectors of the industry suffer under pandemic protocols.

Funds that invested heavily in industrial REITs have benefited, including Mr. Orrico’s Middlefield Global Real Estate Class fund, one of two real estate funds to receive the Refinitiv Lipper Fund Award this year alongside CI Investment’s First Asset REIT Income Fund. Middlefield’s fund won for the three-year period ended July 31, while CI’s fund won for the five-year period.

Both hold a good chunk of industrial plays, as well as a mix of residential, retail office and other real estate plays.

“Not all real estate sectors are created equally,” says Mr. Orrico. “We got out in front of this demand and appetite for industrial real estate several years ago, and that has been a very positive contributor to our performance.”

The Middlefield Global Real Estate Class, with a management expense ratio (MER) of 1.15 per cent, has seen an annualized total return of 7.6 per cent over the past three years and 6.6 per cent over the past five years as of Nov. 17, according to Morningstar. The fund is down 2.5 per cent so far this year, with select retail and office REITs having a negative impact in the first half of the year. That compares with a 10.6-per-cent drop in the total return of the benchmark S&P/TSX Capped REIT Index over the same period. The benchmark index was up 5.6 per cent over the past three years and 8.1 per cent over the past five years.

About 40 per cent of the fund’s holdings are industrial REITs, while retail accounts for about 20 per cent (up from about 10 per cent before the pandemic), while office and apartment REITs each account for about 15 per cent. The remainder is real estate services companies such as Colliers International Group.

Some of the fund’s top holdings include industrial names such as Granite REIT, WPT Industrial REIT and STAG Industrial Inc. It also holds Equinix Inc., a California-based REIT specializing in internet connection and data centres and Alexandria Real Estate Equities Inc., an American REIT that invests in office buildings and laboratories leased to tenants in the life science and technology industries.

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Mr. Orrico increased his stake in some retail REITs, such as RioCan REIT, First Capital REIT and SmartCentres REIT, after they were beaten down during the market drop in the spring.

“I don’t think retail real estate is going away,” Mr. Orrico says. “It will be a case where the strongest survive. Those REITs with the best-quality retail properties will do well, and there are a number of them in Canada.”

Mr. Orrico has a “constructive outlook” on the economy heading into 2021 and 2022. He believes the current environment, with various real estate classes behaving differently, makes active management in the sector “more important than ever.”

Lee Goldman, a senior portfolio manager with Signature Global Asset Management in Toronto who oversees the First Asset REIT Income Fund, says asset mix and an active management strategy have also helped the fund beat the benchmark in recent years.

The fund currently holds about 28 per cent multifamily investments, 20 per cent industrial, 17 per cent retail and 6 per cent office, with most of the remainder in seniors homes and single-family housing, leaving about 4.5 per cent in cash. Its top holdings include Dream Industrial REIT, single-family rental company Tricon Residential Inc., Summit Industrial REIT and multi-residential play InterRent REIT.

The fund, which has an MER of 1.3 per cent, has seen a three-year annualized total return of 6.7 per cent and a five-year return of about 9.1 per cent as of Nov. 17, according to Morningstar. The fund has dropped about 5 per cent over the past year, weighed down by its holdings in office and retail affected by the pandemic shutdowns, but has still performed better than the benchmark.

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Mr. Goldman says he didn’t make any major shifts in the portfolio amid the pandemic but has added some industrial holdings and trimmed some retail positions in recent months.

Mr. Goldman expects the office and retail sectors to recover and become more attractive for investors, “but I don’t think we’re quite there yet.”

While the sector has been volatile, Mr. Goldman says REITs are in better shape than during the 2008-09 global financial crisis.

“Coming into COVID, balance sheets were in really good shape with fairly low leverage and lots of liquidity,” he says. “We take some comfort in that.”

He also thinks valuations look attractive and says there are a lot of investors chasing real estate, including pension funds and private equity, which bodes well for sector valuations over the long term.

Read more about the winners of this year’s Lipper Awards

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Three small-cap stock picks from Mawer’s $2.5-billion fund manager Jeff Mo

These bond funds produced surprisingly strong returns even amid the low interest rate environment

Three top dividend stock picks from the portfolio of an award-winning fund manager

Full list: The 2020 Lipper Fund Award mutual fund and ETF winners

Full list: The 2020 Lipper Fund Award top mutual fund and ETF group winners

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