Funds of the Month

December 3, 2004

Real Estate Funds

If the real estate run-up of recent years has you eager to invest but you don't want the headaches and risks of owning property, here's another way to snare profits: Buy shares of a real estate mutual fund. Rather than investing in real estate or mortgages directly, these funds buy common stocks of the publicly traded real estate companies and REITs (real estate investment trusts) that own the properties. Besides saving you the trouble of picking individual properties yourself, investing through a real estate fund helps you spread your bets among many properties.

"Real estate mutual funds bring the potential for both current income and long-term growth," says Todd D. Bramson, a financial adviser with Marathon Advisers in Minneapolis. "And since real estate stocks don't parallel the S&P 500 stock market index, owning them also helps diversify your portfolio."

Some real estate mutual funds invest a large chunk of assets in industries other than real estate, however. To get the most bang for the buck, we chose two funds that keep at least 80 percent of their money in real estate companies.

Lee has spread the fund's money almost equally among more than 40 holdings, which include real estate developers, mortgage financing companies, and hotel chains. This balance usually leads to steady portfolio returns. Lee is also the archetypal "buy and hold" investor, resulting in an extraordinarily low turnover rate of 4 percent that helps minimize the capital gains taxable to shareholders.

American Century Real Estate Fund. This fund, which holds about 55 stocks, invests mostly in REITs that show strong potential for continuing cash flow and dividend growth. Its skipper, Scott Blasdell, has an impressive track record: His fund beat 80 percent of its peers during the 2003 stock market rally, and over three and five years posted above-average returns while taking only average risk. Blasdell looks for solid, growth-oriented stocks, but shuns those with too high a price tag. When the timing seems right, he'll also take modest risks among real estate subsectors, such as hotel stocks or companies that own outlet centers. He has put money into apartment REITs, since rising interest rates favor them by discouraging renters from buying houses.