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Funds target global real estate growth

Investors are finding there are more property options available to them than simple home ownership

FUNDS REPORTER

For most people, owning a house is probably their largest real estate investment.

But more financial service companies are betting that investors will want more exposure to this asset class, and are rolling out funds that invest in property around the world.

Mackenzie Financial Corp. recently launched Mackenzie Universal Global Property Income Fund - its second global real estate offering, but this time it's a hedge fund with a monthly distribution.

Guardian Group of Funds Ltd., Manulife Mutual Funds and Desjardins Funds have also jumped into this sector this year with global funds.

The growing number of publicly listed property companies, and also real estate investment trusts (REITs) - recently introduced in Britain - have sparked attention to the sector.

(REITs own income-producing properties such as office towers, shopping malls and apartment complexes.)

"They have grown dramatically over 10 years," said Christine Girvan, chief executive officer of the Canadian arm of ABN AMRO Asset Management, which runs the Mackenzie real estate funds.

There has also been increased interest by pension funds in the sector because of the steady income stemming from rents by investing directly in property or through institutional property funds, Ms. Girvan said.

Real estate mutual funds and exchange-traded funds, which mimic real-estate indexes, typically focus on publicly listed commercial properties.

While the global real estate sector was on fire last year - with some funds garnering returns of more than 40 per cent - there has been a pullback this year.

Some of the red in the returns of Canadian-dollar-denominated funds can be attributed to the strong Canadian dollar, and the fact they are not hedged.

But U.S. and European property stocks have also been whacked on worries about rising interest rates and the turmoil in the U.S. subprime mortgage market. Some of that anxiety spilled into global stock markets, which took a steep tumble last week.

Stephen Way, a portfolio manager with AGF Management Ltd., said he has reduced his U.S. weighting in the AGF Global Real Estate Fund to about 18 per cent, but is more upbeat about places like Singapore, Hong Kong and Japan in the Asia-Pacific region.

"As an index, stocks [in that region] have outperformed the broader global property indices by some 25 to 30 per cent over the last six months," Mr. Way said. "It shows the benefits of investing globally in real estate, and that different markets can move different ways.

"I am also quite confident on the outlook for continental Europe and the U.K.," added the manager, who had 15 per cent of his fund in cash last week. "We will be using the pullback to add to our positions."

Steven Buller, who runs the Fidelity Global Real Estate Fund for Fidelity Investments Canada Ltd., said that sentiment in the sector is indeed negative, but argues the "fundamentals in commercial property continue to be quite good, albeit with a slight downtick this year."

Real estate should be considered by investors in a multi-asset portfolio, and over the longer term they can expect an 8- to 10-per-cent annual return, said Mr. Buller.

The fund arm of Desjardins Group started Desjardins Global Real Estate Fund in January in time for its newly launched Chorus Portfolios, a program that packages mutual funds according to risk profiles.

The rationale for including a real-estate fund is that it is more weakly correlated to stock markets such as the S&P 500, and can reduce volatility in a portfolio, said Steven Zanolin, product manager for Desjardins Funds.

Morningstar Canada analyst Mark Chow said that a real estate fund can certainly provide diversification, but should be less than 10 per cent of a portfolio. But investors should be cautious because real estate has already been a "hot area, and has done very well," he said.

But Raynor Burke, fund analyst at National Bank Financial Inc., suggested the pullback in the global real estate sector could be a buying opportunity.

"It's better to buy now than six months ago," Mr. Burke said. "But I wouldn't put more than 2 to 5 per cent of a portfolio in this ... We are coming off some big years. This isn't going to be a home-run fund."

Buying opportunity?

Real estate funds have had a pullback lately after posting hot numbers in recent years. Here is a sample of funds with at least a one-year track record (as of June 2007).

Net61
Assetsmonthyear200620052004
Name(millions)MERreturnReturnReturnReturnReturn
AGF Global Real Estate Equity 62.23.15-10.10%16.47%42.79% 8.17%19.39%
AGF Global Real Estate Equity (US$) -1.52%22.02%42.91%11.62%28.36%
CIBC Canadian Real Estate 94.12.87 2.24%25.63%29.61%17.52%20.32%
Dynamic FocusPlus Real Estate194.32.66 0.27%18.36%26.19%16.32%22.52%
Fidelity Global Real Estate B 90.82.45-12.49%14.08%
Fidelity Global Real Estate B (US$) -4.21%19.54%
Mackenzie Univ Wld Real Est Class262.52.71-16.68% 9.59%44.58% 4.70%24.14%
Sentry Select REIT146.92.64 3.87%21.26%22.01%21.94%16.70%
iShares CDN REIT Sector Index269.10.55 2.70%24.75%26.80%24.28%13.11%

TRISH McALASTER/THE GLOBE AND MAIL

© 2007 The Globe and Mail. All rights reserved.

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