Now's not the time for a real estate fund.
After taking a breather in 2009, real estate fund investors have jumped back in with two feet in 2010. Through May, the category has received net inflows of nearly $1.6 billion, more than 5 times the net amount invested for all of 2009. This money missed a majority of the rally that began in earnest in March 2009, as investors didn't appear tempted to get back in after the painful crash seen in 2008. That fact isn't surprising; more than 97% of the category's nearly $2.5 billion in net inflows occurred in the second quarter of 2008, just before the sector and the broader market went into a free-fall. But the bad news is they're coming very late to the party.
Two factors likely dominate investors' current attraction to the real estate sector: total returns and current yield. The sector's rally has continued into 2010, and even with the May sell-off, the group's 13.4% gain for the year to date through June 14 is far ahead of its nearest rival, the consumer discretionary category, which has turned in a 9.8% gain thus far. As my colleague stock analyst Todd Lukasik noted in a recent commentary, the large amount of capital that REITs, pension funds, and private investment funds have amassed for commercial real estate investment has thus far overshadowed the available supply of properties available for sale. REIT management teams are reporting plenty of bidding competition on available assets, which has contributed to rising transaction prices in recent quarters.
REITs' rising stock prices have further compressed yields across the board so that they are now near historic lows. Vanguard REIT Index
After the market swoon and recovery seen in recent years, costs and diversification still appear fresh in investors' minds when deciding where to invest. Not surprisingly, Vanguard REIT Index commanded 24% of total net inflows this year but more than its 16% market share at the start of 2010. Fidelity investors appear to have a preference for income, as Fidelity Real Estate Income's
The biggest move, however, has been in First American Real Estate Securities
Andrew Gogerty is a mutual fund analyst with Morningstar.