From the October 2008 issue of Investment Advisor • Subscribe!

Funds Get Real Amid Unreal Housing Market

For many homeowners, the real estate market has turned, well, unreal.The average home price fell 18.22% since its peak in the second quarter of 2006, according to the Standard & Poor's/Case-Shiller U.S. National Home Price index.

"Not one market is showing a positive return over the past 12 months and seven of the metro areas are reporting declines in excess of 20.0%," says David Blitzer, chairman of the index committee at S&P.

S&P Chief Economist David Wyss sees more downside risk ahead. He believes the peak-to-trough decline for the S&P/Case-Schiller index will be 28% with the bottom coming in the fourth quarter of 2009.

But Lehman Brothers Economist Michelle Meyer points out home prices fell at a slower-than-expected pace in the second quarter while consumer confidence improved.

Of course, most real estate mutual funds are not invested in single-family homes. Instead, they concentrate on other parts of the real estate business: industrial property, offices, malls, lodging, or storage units.

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For CGM Realty, the top-performing real estate fund for the one-, three-, and five-year periods (see table below), the focus is on industrial and office space. As of the end of June, the most recent period for which this information is available, the fund had 28.6% of its assets in the industrial and office category. It had another 23.4% of its assets in retail real estate investment trusts (REITs). Interestingly, unlike some other pure-play real estate funds, CGM Realty also invests in materials stocks---concentrating on materials that are used to build real estate.

"A sputtering domestic economy notwithstanding, it is to a large extent world market forces that determine rising commodity prices, not solely U.S. consumer demand," says Robert Kemp, president of CGM, which had 33.8% of the fund's assets in materials stocks as of the end of June.

First American Real Estate Securities, a top performer for the three- and five-year periods, has a more traditional strategy, investing only in REITs or other real estate stocks. Its top holdings, as of June, were Simon Property Group, ProLogic, and Boston Property.---Beth Piskora


Contact Beth Piskora, managing editor Standard & Poor's Equity Research, at beth_piskora@standardandpoors.com.

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