Looking at Security Capital European Real Estate Fund’s track record, it’s easy to be impressed. According to Standard & Poor’s, SEUIX ranked 13th within the entire universe of 1,853 funds in the international equity category on a one-year total return basis. The fund was upgraded to five stars in December 2002, its turnover rate is a mere 33% versus an average 133% for its peers, and for the three-year period ended March 31, 2003, SEUIX had an average annualized return of 6.6%, compared to -18.1% for the FTSE World Index-ex U.S. What’s not to like? Though with assets of just under $13 million, one wonders why more people aren’t climbing aboard.
U.S. real estate has been one of the few sectors that has thrived during the bear market. European real estate, which performs similarly to its U.S. counterpart, has just as many, if not more, investment opportunities, and yet many Americans are still apprehensive about investing overseas.
“U.S.-based clients tend to invest only in U.S. securities whereas the Dutch and Canadians especially have very aggressively invested cross-border,” says Kenneth D. Statz, one of the three members of Security Capital Research & Management Inc.’s portfolio management committee. “My theory is that unless investors see a need to go outside their borders, they tend to stay home.” Currently, he says, the U.S. has an enormous market with such a variety of opportunities that the need for international diversification seems to be very low. But over time, Statz says he expects that to change.
As part of the management committee, Statz is one of three portfolio managers who make the final investment decisions for this fund. Statz, Kevin Bedell, and Anthony Manno review equities proposed by Security Capital’s analyst and VP Bernhard Krieg to determine which real estate securities from which countries will be included in the fund. “Some of the industry trends we see in the United States are followed in Europe and elsewhere around the world,” says Krieg. But “you get a little bit of a different twist in the sense that you have different currency exposure.”
Reviewing equities on a country-neutral and currency-neutral basis, SEUIX is a fund that invests in undervalued real estate securities with a strong management company. We recently spoke with Statz and Krieg about their European research tactics, and their emphasis on diversification.
Is doing research on European companies different than U.S. companies? Krieg: We probably rely a little bit less on face-to-face meetings than we do here in the United States. I do try to go back about twice a year to meet with companies and I also go to conferences, where I can meet with a number of people in a short period of time. Disclosure in Europe is a little sketchier; there is no similar body in Europe to the SEC. Their disclosure requirements are not quite as stringent as they are in the United States. You have to do a little bit more extrapolating of results there, [whereas] here where we have more minute-to-minute reporting every quarter. There, [companies] report mostly on a semi-annual basis.
Statz: There is an interesting interplay between the U.S. and European real estate stocks. The U.S. economy and the global economy are so integrated that many of the things we see developing in the U.S. seem to bubble to the surface within a few months and affect real estate companies around the globe, often the same way. We have a bit of an early warning system that seems to work pretty well in following European real estate companies.
What’s the same, and what’s different, about investing in European real estate compared with investing in the U.S.? For example, REITs in U.S. must pay out 90% of their taxable income each year to shareholders. Are there similar requirements in Europe? Krieg: There are number of countries that actually have a very similar structure in place. The Netherlands and Belgium have REIT-like structures in place, and the companies that are a part of our universe do have that payout requirement and are higher in yield than most other companies. France [will soon also] have a tax plan structure similar to the REITs that we have here.
Nearly 70% of your investments are in the U.K. and France, and only 3% in Germany? Why the disparity? How do you determine risk in these different countries? Krieg: The property sector in Europe is still not as well developed as it is here in the United States. Your investable universe of companies is not evenly distributed [among each country in Europe]. There is a well-established sector with a lot of depth in the United Kingdom and in France, while in countries like Germany, which has historically been more oriented toward open- and closed-end funds given the strong presence of banks there, whose [real estate] sector is not quite as developed yet. But I think that is [becoming] less of an issue these days with a common currency and a move toward an integrated economy. The country borders which have been a lot more important in past decades have definitely lost some of their dividing factor.