Warming Up To International Real Estate Funds

Last September I wrote an article for TheStreet.com pooh-poohing the RMR Asian Pacific Real Estate Fund (RAP). This was a bad call.

Lately I have been learning about, and warming up to the idea of adding a little bit of of international real estate, probably not RAP however, to client portfolios.

I am trying to learn about the various products out there. Alpine has a CEF (AWP) and an OEF [EGLRX]. StateStreet has the SPDR DJ Wilshire Intl Real Estate ETF (RWX). There is the ING Clarion Global Real Estate Fund (IGR), Cohen & Steers Worldwide Realty Income (RWF) and WisdomTree has an ETF (DRW) that came out on Tuesday, and could yield in the mid-threes or higher.

I have also looked at several individual stocks. I'm sure I am missing several exchange traded products, and other than EGLRX I didn't look for OEFs.

I am always on a quest for asset classes that have a low correlation to U.S. equities, and may also have a little yield. RWX does not really have much yield, but as I mentioned, the WisdomTree product looks like it will.

My inclination at this point, which is still early in the learning process, would be to allocate 2% to a combo of a fund and an individual stock from a country I liked from a top down perspective, and if there was a stock that I would want to own from the bottom up. Obviously this sort of mix will not fit in all accounts, so in those cases I would just go with the fund.

The picture at the right is one I found on the net of T's favorite real estate spot, Croatia. While I can't find an exchanged traded anything that isolates Croatia (open to suggestion), every picture that involves water from there looks spectacular. This of course may not mean anything in terms of investment merit.

If you know of any funds that I missed, please leave the ticker in the comments.

Comments

[Everyday Fi...:]

Greetings, I did an article on international real estate funds a while back. I thought I'd add one to the mix: "the next fund I want to highlight is Cohen & Steers International Realty A (IRFAX). Now, this fund does carry a 4.5% load, which I normally advise against; and the annual fee is 1.7%. However, this fund performed even better than the EGLRX, so you can practically take your pick." Over the prior two years, even with the load, would have done well with the IRFAX. Had some extra into on oversees REITs; check it out if interested:

everydayfinance.blogsp...

Morningstar report for IRFAX;

quicktake.morningstar....;Symbol=IRFAX&...

2007 Jun 07 09:54 AM

[JonD:]

also FIREX for an OEF.

but i think the long-term choice is the yet to be released ETF from iShares called ishares FTSE NAREIT Global Real Estate ex-US -- it's expected to have expense ratio of 0.48% (no way IRFAX can overcome that advantage, as an aside -- Dan, I assume you are a broker!!). don't know all the details yet since it hasn't started trading but i expect i to be similar to RWX (one of the fastest growing ETF launches in history) but at a lower ER (.48 vs. .60 for RWX) and I believe will have an even broader index to which it will track.

i personally own EGLRX but will switch to the ishares product when it launches.

2007 Jun 07 10:03 AM

[Roger Nusbaum:]

I didn't know there was an iShare equivalent in the hopper, thanks for the heads up on it.

2007 Jun 07 10:31 AM

[Ralph F:]

Roger, what are your thoughts about using closed-end funds when there are ETFs available now like the WisdomTree fund you mentioned?

2007 Jun 07 10:43 AM

[Roger Nusbaum:]

I tend to be product agnostic. I'll buy whatever I think is the best thing that captures the effect, stock, ETF, CEF and even OEF (but it is rare that i think an OEF is best). I may or may not turn out to be right with the product I choose but....

In this space, I have been very impressed with everything I know about Alpine. The AWP is brand new, they've barely started investing so I don't think we know anything about it yet other than the manager is good (IMO) and the OEF version has been a good hold.

I don't know if or when I will hop in here but I would also add that as I have started to study this segment I have found several stocks that I might end up preferring over any fund.

2007 Jun 07 11:08 AM

[Frank Li:]

Hi Roger,

I was looking at the articles on Seeking Alpha on the funds you mentioned, and there's an interesting excerpt from a Jeffrey Saut essay in which he mentions the funds:

<b>Jeffrey Saut's Closed-End Fund Picks For This Interest Rate Environment</b>

He argues that international REITs will do badly if US interest rates rise. Do you agree with that?

2007 Jun 07 11:01 AM

[Roger Nusbaum:]

I read the link you provided and I'm not sure he is saying that, I see the part about the hedge for the floating rate fund he favors, so <em>if</em>... that is what he means....

In general terms higher rates tend to create a challenge for emerging markets so that could create a problem for real estate companies from those markets.

I don't see the connection when talking about RE companies from say the UK, Norway, western Europe or Australia. An exception to the aussie exception might be Westfield which is the biggest company in the space. Despite being located in Australia something like 59% of its properties are located in the US. And in fact there is some history to say that when US rates go up Westfield goes down.

Maybe he's right?

2007 Jun 07 11:31 AM

[Everyday Fi...:]

Here were some thoughts on DRW which launched earlier this week. I had some readers express concern over such a newly launched instrument, but I think it's a legit move for anyone seeking some international/RE exposure; this is also timely wrt the US interest rate concern raised above.

An additional consideration is that real estate is more of a local phenomena than say, an indicator of overall market returns. Look at the US now (stocks way up since 2005, RE lousy in general). Even when the stock market performed poorly early this decade after the dot-com bust, home prices increased at record levels. Additionally, certain markets are still appreciating today, even though the Miami beaches and Jersey shores, etc. are seeing prices continue to decline. Each of these countries has a different dynamic and the correlation coefficient of real estate returns compared to that of stock market returns in aggregate is much less than 1. I love the diversification and low correlation properties of the ETF in addition to the impressive backtested return.

2007 Jun 07 03:33 PM

[ocudoc:]

You might consider some open end funds: IRFIX, FIREX, MSUAX (closed to new investors) and EIIPX. The best are EGLRX and EIIPX at present.
Allen M. Demby, MD

2007 Jun 08 09:40 AM

[les:]

The problem with EGLRX (and AWP, I assume) is that it is not a pure play on international (non-US). It is "global RE" and thus has a variable (management discretion) US component. Last I looked it was about 15%

2007 Jun 09 09:36 PM

[User 458325:]

Re: Croatia Fund - See Adriatic Opportunities Fund on emergingmarketproperty...

Jul 22 11:15 AM