Portfolio manager Steven J. Buller said his fund's stellar one-year return reflects broader market trends: a big technical correction, partly spurred by the rise in U.S. rates in April and May of 2004, sent REIT valuations tumbling 20% the year before, while prices jumped 12% or so during the latest quarter, he said.
But the fund's survey-topping gain also points up a strategic decision by Mr. Buller and his team of analysts in the past year or so: to focus more on individual stock picking rather than on making relative bets on specific sectors of the market such as shopping malls or office buildings, he said.
With the REIT market growing strongly in recent years, the analyst team has grown to six people, allowing the fund to invest with "more conviction" by taking more concentrated positions, Mr. Buller said. For example, Fidelity Real Estate's top 10 holdings now account for roughly 58% of its total assets, up from the low 40s as recently as 15 months ago, he said.
Looking ahead, Mr. Buller said, he's not losing sleep about the uptick in U.S. interest rates because historically, REIT prices haven't shown much correlation to long-term rate movements. It's impossible to predict year-by-year gains, but investors can probably look for returns of 7% to 10% a year over the midterm, he said.
In second place, the Baron Growth fund, a small-cap offering from New York-based Baron Capital Inc., gained 19.6% for the year.
Ronald Baron, the CEO of Baron Capital and portfolio manager of the fund, said he and his team are too focused on finding the next growth stories among companies with market capitalizations of less than $2.5 billion to worry about tracking benchmarks or broader market moves. "Every minute you spend thinking about what the stock market is going to do is a wasted minute," he said.
The rapid pace of change in the country and the economy creates a lot of opportunities, and the willingness of shell-shocked investors to settle for the middling returns hedge funds are offering up is giving "people like us a tremendous opportunity," Mr. Baron said.
While a recent report by Morningstar Inc., Chicago, expressed concern that more than 50% of the fund's holdings now qualify as midcap stocks, Mr. Baron said that by his definition of midcap — between $2.5 billion and $8 billion — the figure is closer to 25%. Finding a great growth company, only to sell as soon as it crosses an arbitrary tripwire, just leaves too much value on the table, he said.
That difference of opinion didn't prevent Mr. Baron from making Morningstar's stock one of the latest additions to his fund. Baron Growth picked up about 1 million of the 7 million shares the fund research company sold to the public in May for around $20 a share. The share price stands now around $28, and "we're betting they are going to be successful" in meeting the critical needs of U.S. investors, he said.
In third place with an 18.4% return for the year was the Franklin Balance Sheet Investment fund offered by San Mateo, Calif.-based Franklin Templeton Investments.
Portfolio manager Bruce C. Baughman credited his team's success to its single-minded focus on buying good companies of any size trading at "a very cheap price-to-book value" and holding on for the long term. Worrying about benchmarks, he said, is "like trying to swim while carrying rocks."
For the latest quarter, holdings that contributed strongly to the fund's gains included ESCO Technologies Inc., a St. Louis-based maker of filtration and systems testing equipment that the fund picked up in 1993, and Aztar Corp., a Phoenix-based gaming company the portfolio has held since 1995, Mr. Baughman said.
While Mr. Baughman declined to say what he's buying now in anticipation of gains five years hence, he did express concerns about the pace of gains by the homebuilding shares in his portfolio. "I haven't sold any" yet, but it's a situation that has to be watched, he said.
In fourth place, with a 16.5% gain, was the Fidelity Low Priced Stock fund, followed by the Fidelity Value fund, in fifth place, with 16.4%.
For the five years through June 30, the Fidelity Real Estate fund once again beat all comers with a 20.2% compounded annual gain, followed by Fidelity Low Priced Stock fund with 18.7%; the T. Rowe Price Small-Cap Value fund, offered by Baltimore-based T. Rowe Price Group, with 17.7%; the Franklin Balance Sheet fund, up 16.6%; and the T. Rowe Price Midcap Value Fund, with a 16.4% gain.