Constructing a diversified portfolio of companies that invest in real estate companies could be time-consuming and expensive. Real estate mutual funds represent an attractive option for investors to gain exposure to the U.S. real estate industry at a reasonable cost. Real estate mutual funds typically invest in real estate investment trusts (REITs) that specialize in developing, buying and holding various real estate properties, such as hotels, residential buildings, offices and industrial properties. Real estate holdings are popular among investors due to their diversification appeal and partial hedge against inflation.
Fidelity Real Estate Investment Portfolio Fund
The Fidelity Real Estate Investment Portfolio Fund provides broad exposure to the real estate industry. The fund employs fundamental analysis by using both bottom-up and top-down investing approaches to identify undervalued REITs. About 39% of the fund's assets are invested in large market-cap REITs, while medium real estate stocks have 45% allocation. As of October 2015, its assets are composed of industrial/office REITS with 25.8% allocation, retail REITs with 24.1% allocation and residential REITs with 22.9% allocation. Because the fund focuses on the fundamental side, it closely examines companies' earnings, balance sheets and financial soundness. To some extent, the fund uses a top-down approach to select its holdings based on macroeconomic factors that affect the real estate industry.
From 2005 to 2015, the fund generated an average annual return of 6.6% and a standard deviation of 26.5%, resulting in a Sharpe ratio of 0.33. Its overweight position in storage and data centers REITs gives the fund an edge in terms of future growth prospects, as public storage and data centers properties are poised to experience growing demand from the general population and businesses. The fund has an expense ratio of 0.78% and a four-star rating from Morningstar. The Fidelity Real Estate Investment Portfolio Fund is most appropriate for investors who want to gain broadly diversified exposure to the real estate industry at a very low expense.
Baron Real Estate Fund
The Baron Real Estate Fund invests in real estate and real estate-related companies with broad exposure to many industries and capitalization ranges with a focus on growth potential. The fund's portfolio is concentrated in consumer discretionary stocks with about 36% allocation and includes hotels, casinos and various leisure companies. It also allocates 38.1% of its assets to financials stocks with an emphasis on REITs. Because it invests in stocks of not only REITs, but also companies that own and operate their own real estate, the fund's performance is somewhat tied to how well the underlying businesses located on these properties perform.
The Baron Real Estate Fund was created in 2009. Since its inception, it has generated an average annual return of 16.8% and a standard deviation of 16.5%, with a Sharpe ratio of 1.02. The fund's strong performance is mainly attributable to its strong stock selection and a mixture of REITs and non-REITs stocks. Because it contains many consumer discretionary stocks, a slowdown in consumer spending in the future may negatively affect the fund's performance. The fund has an expense ratio of 1.06% and a five-star rating from Morningstar. It is most appropriate for investors who want exposure to real estate stocks and real estate-related stocks with lower volatility compared to pure real estate mutual funds.
REMS Real Estate Value-Opportunity Fund
The REMS Real Estate Value-Opportunity Fund pursues value investments in common and preferred stocks of publicly traded REITs and real estate operating companies. It focuses on medium- and small-market cap companies. The fund allocates a large portion of its assets into real estate companies that develop and operate office buildings, hotels and industrial buildings. The top five holdings of the fund account for 18.3% of its portfolio and include WCI Communities, Inc., iStar, Inc., Brandywine Realty Trust, Hersha Hospitality Trust and Plum Creek Timber Co., Inc.
The REMS Real Estate Value-Opportunity Fund has generated an average annual return of 8.35% and a standard deviation of 23.7% from 2005 to 2015, resulting in a Sharpe ratio of 0.41. Because its portfolio is highly exposed to upscale and luxury hotels and residential properties, discretionary consumer spending plays an important role in the fund's performance. As consumer spending growth has slowed in 2015 and may possibly continue to be sluggish going forward, this could pose headwinds for the fund. It has an expense ratio of 1.61% and a four-star rating from Morningstar. This fund is most appropriate for investors who want to gain access to stocks of a wide variety of real estate and real estate-related U.S. companies.