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If you fancy the idea of owning property but don't have the cash to buy it, a real estate fund may be what you've been looking for. Real estate funds have been growing in popularity over the past few years. One of the reasons these income-producing funds have enjoyed a shareholder increase is that most invest in equity Real Estate Investment Trusts (REITs).
An equity REIT is a stock that must pay out 95 percent of its taxable income as dividends if it's to enjoy a tax-advantaged status. What REIT companies typically do is own and manage a portfolio of income-producing real estate. One REIT might own apartment complexes in the Southwest; another could specialize in owning hotels nationwide.
Because there is almost no end to the real estate property combinations you can make, most equity REITs represent a sector-specific diversified investment. Put a group of different REITs in a mutual fund portfolio, and you multiply that exposure.
"Real estate represents about 17 percent of our country's investment asset base," says Robert W. Benson, who has managed the Pioneer Real Estate Shares fund since its inception in October 1993. "The reason to have real estate in your portfolio is diversification--and to invest in a part of the U.S. economy that's doing quite well at this point."
Another reason behind the growing interest in real estate funds is that the fundamentals of the real estate cycle, which typically lasts between five and seven years, have been and continue to look strong. Riding the wave of the real estate cycle can be tricky, however. There are easily 10 different real estate property types. If you've lived in one part of the country for any length of time, you have firsthand knowledge of how prices on different types of real estate can fluctuate: Sometimes prices on, say, multifamily apartments are hot; sometimes they're not.
Benson figures the United States is about midway through a real estate cycle. "We're in about year three," he says. "And we have at least a few years of improving fundamentals ahead of us, which could result in REITs growing their cash flows."
In the Pioneer fund, you'll find most assets invested in four different property types: industrial/office, hotels, apartments, and retail, with overweightings in hotels and office and underweightings in the others. Of the portfolio's 33 companies, 29 are REITs.
When looking for new investments, Benson focuses on equity REITs that aren't necessarily the highest yielding but have the highest growth potential and, hence, could increase their dividends.
Even if the idea of real estate fund investing appeals to you, don't bet the farm. An asset allocation of between 5 percent and 15 percent is probably enough exposure. And as far as performance goes, real estate funds have a mind of their own: In 1997, the average annual total return for the group was 19.74 percent. That's below the returns of both the Dow Jones Industrial Average (up almost 25 percent) and the S&P 500 Index (up 33.4 percent). In 1996, however, the group's average return of more than 36 percent beat the indices.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).
At A Glance
Fund name: Pioneer Real Estate Shares
Portfolio manager: Robert W. Benson
Managed by: Pioneer Funds Distributor Inc.
Total assets: $220 million
Average annual return: 14.54%
Maximum load: 5.75% on investments of $50,000 or less Management fee: 1%
Phone: (800) 225-6292
Figures are as of February 16, 1998
Lipper Analytical Services Inc., (212) 393-1300, http://www.lipperweb.com