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PERFORMANCE SUMMARY
Cumulative | Annualized | |||||
| 3 Month | YTD | 1 Year | 3 Year | 5 Year | 10 Year/ LOF 1 | |
Fidelity Real Estate Investment Portfolio (MUTF:FRESX) Gross Expense Ratio: 0.65% 2 | 17.19% | 14.16% | 33.41% | 3.55% | 4.44% | 7.42% |
S&P 500 Index | 5.89% | 22.08% | 36.35% | 11.91% | 15.98% | 13.38% |
MSCI US IMI Real Estate 25/50 Linked Index | 17.23% | 13.71% | 34.38% | 2.63% | 2.33% | 5.95% |
Morningstar Fund Real Estate | 15.79% | 13.77% | 32.06% | 2.58% | 4.53% | 6.94% |
% Rank in Morningstar Category (1% = Best) | -- | -- | 46% | 33% | 64% | 40% |
# of Funds in Morningstar Category | -- | -- | 238 | 229 | 210 | 152 |
| 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/17/1986. 2 This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year, or estimated amounts for the current fiscal year in the case of a newly launched fund. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit Fidelity Funds | Mutual Funds from Fidelity Investments, Financial Professionals | Fidelity Institutional, or Fidelity NetBenefits | Employee Benefits. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. The value of securities of issuers in the real estate industry can be affected by changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, and the management skill and creditworthiness of the issuer. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. Not FDIC Insured • May Lose Value • No Bank Guarantee |
Market Review
For the third quarter of 2024, the U.S. real estate investment trust market, as measured by the MSCI U.S. IMI Real Estate 25/50 Linked Index, gained 17.23% on the potential for lower borrowing costs amid an environment of falling interest rates. This index far outpaced the 5.89% gain of the broad U.S. stock market, according to the S&P 500®index. (SP500, SPX)
In a strong environment for REIT performance, every industry represented in the index gained ground, with most generating a double-digit return. Office REITs (+28%) fared especially well and continued to regain some value previously lost during the COVID-19 pandemic, while the real estate services (+26%), self-storage (+23%), other specialized (+22%) and telecom tower (+21%) categories also generated strong results. The hotel & resort (+1%) and single-family residential (+6%) REIT industries produced the smallest gains in Q3.
During the period, the REIT market benefited from the shift toward global monetary easing, which gained steam when the Fed lowered its benchmark federal funds rate after a historic hiking cycle that began in March 2022 to combat persistently high inflation. On September 18, the central bank cut rates by 0.50 percentage points, opting for a bolder start in making its first rate reduction since March 2020. The Fed's stated goal is to achieve a soft landing for the economy: bring down inflation amid a gradual cooling in the labor market while neither spurring nor slowing economic activity. The Fed has projected the equivalent of two more quarter-point cuts this year.
Meanwhile, continued gains in the S&P 500®index in Q3 reflected resilient corporate profits, the promise of artificial intelligence and the Federal Reserve's long-anticipated pivot to cutting interest rates.
Amid this favorable backdrop for higher-risk assets, the index continued its late-2023 momentum and ended September at its all-time closing high. Value stocks led the way, while smaller-cap shares outpaced large-caps in what was a broad rally, with eight of 11 sectors outpacing the market.
Almost all asset categories gained sharply in Q3. The S&P 500® rose 1.22% in July, with the top-heavy index marking a fresh all-time high before a sharp three-week reversal as investors rotated into small-cap, value and cyclical shares due to concern about a recession in the U.S. Volatility spiked, but the index rallied as August (+2.43%) unfolded. In September (+2.14%), stocks rose in anticipation of the Fed's mid-month meeting and continued to climb after the rate cut.
Performance Review
For the third quarter, the fund gained 17.19%, versus 17.23% for the benchmark, the MSCI U.S. IMI Real Estate 25/50 Linked Index.
Versus the real estate industry index in Q3, the fund's lack of exposure to the market-leading office REIT category and an overweight among single-family residential REITs detracted the most from relative performance. Within the latter category, an overweight in American Homes 4 Rent (AMH, +4%) was a notable relative detractor.
During the period, a drop in mortgage rates making home purchases more affordable pressured shares of this company focused on single-family-home rentals.
Another stock that detracted for the fund in relative terms was Americold Realty Trust (COLD), an industrial REIT specializing in temperature-controlled storage facilities. The stock managed a roughly 12% gain during the quarter that nevertheless trailed the benchmark, partly reflecting operating challenges and reduced financial expectations at the company. Also hampering the fund's performance compared with the industry index was lacking exposure to strong-performing benchmark component Realty Income (O, +22%). Like other triple-net REITs, Realty Income tends to be sensitive to shifts in interest rates.
As rates fell this period and as the market expected further reductions down the road, this company saw its stock outperform.
On the positive side, stock picking in the health care REIT and real estate services groups aided the fund's relative result, as did a combination of an overweight and security selection among self-storage REITs. In health care, our biggest relative contributor was an overweight in Ventas (VTR, +26%). This industry generally performed well this period as it continued to recover following the pandemic. As the supply picture improved and demand for assisted-living space grew, rents rose while labor inflation subsided, leading to tremendous cash-flow growth among these businesses.
In real estate services, the fund's overweight in CBRE Group (CBRE, +40%) contributed. On July 25, the real-estate services firm released favorable financial results for Q2 and boosted its full-year earnings forecast. Also boosting the fund was an overweight in Public Storage (PSA, +28%), which like other self-storage operators this quarter benefited from increased optimism about the industry's supply/demand backdrop. As of September 30, Ventas, CBRE and Public Storage all were top-10 portfolio holdings.
Outlook and Positioning
During the period, we increasingly favored "cyclical recovery" industries we believe stand to benefit from limited new supply. This involved investing in industries and stocks that we felt were poised for a cyclical recovery, especially those areas where, until recently, we saw the most supply that needed to be absorbed. Sunbelt apartments, industrial properties and self-storage facilities are three areas that particularly stand out to us. Assisted-living is another, although constraints on new building in that category have been in place for longer. Many of these market segments have struggled in recent years but have started to perform better of late, as investors have recognized some of the opportunities. Market participants are looking ahead to the next 12 months, and because it will take some time to resolve the supply-related imbalances, we feel good about the investment potential to be found in these areas.
Our exposure to self-storage, which grew very slightly during the quarter and finished September at 11% of the portfolio, reflected our view that the industry's fundamentals have likely troughed, making it possible to invest in the companies at discounted valuations. This creates what we see as an attractive opportunity, given that self-storage REITs, due to their strong growth rates and business models, historically have traded at a premium to the overall REIT market. Meanwhile, the fund's outsized exposure to apartment REITs reflected our view that the industry is well positioned over the long term. On September 30, about 10% of the fund was invested in the apartment industry.
Meanwhile, we maintained substantial exposure to industrial REITs (about 14% of the fund at quarter end) due to continued strong demand for specialized distribution facilities, driven in part by rapid growth in e-commerce. Meanwhile, we maintained minimal exposure to mall owners, given the significant long-term business challenges they face. With the rise in e-commerce, consumers
Increasingly are bypassing physical stores and receiving goods at their homes. We think this trend bodes negatively for many, though not all, retail property owners and well for owners of distribution and logistics facilities. However, we did see attractive opportunities among retail strip-center REITs and, as such, maintained an overweight in the industry. As we see it, owners of strip centers have much better businesses than mall owners, benefiting from favorable demand and more limited supply of attractive locations. We kept a focus on grocery-anchored centers, whose more essential nature we believe makes them less vulnerable to long-term trends.
We also continued to hold no office REITs as of September 30. We saw offices as a poor business even before the pandemic. Now, we believe the situation has gotten even worse.
At the same time, we remain overweight data centers – which made up about 11% of the fund on September 30. It's become increasingly challenging to satisfy the demand for data centers due to constraints on new supply, which include access to power and water resources and the scarcity of optimal locations. Many customers want to be close to the internet's on- and off ramps to make their data connections faster. Thus, well-located data centers are seeing particularly strong growth in their rental income. This situation is creating tremendous pricing power for the industry.
Looking ahead, the Fed has cut interest rates, as expected, and the potential remains for additional rate cuts – moves that should result in a reduction in the cost of capital. Given the capital-intensive nature of real estate, we'd expect that to continue to provide a tailwind for the asset class. Another potential boost for REITs is the fact that across most real estate industries – data centers being the notable exception – new competitive supply is coming down.
In short, we're feeling positive about REITs these days and optimistic about their opportunity over the medium to long term.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
