TOP PERFORMING MANAGERS: Real estate strategies 'on a tear,' taking top equity slots

It's real estate all the way.

In the Morningstar Separate Account/Commingled Fund Database report for the year ended Dec. 31, real estate strategies dominated other equity approaches. Eight out of the top 10 managers had a real estate focus.

"It's not a surprise given real estate … has been on a tear," said Steve Deutsch, director of separate accounts-collective investment trusts at Morningstar. "The results so far would indicate that at this particular point of time, real estate, an international component, value and a small-capitalization approach seem to have been the drivers of the overall results."

Cohen & Steers Capital Management Inc., New York, led the overall U.S. stock and specialty category with its European real estate securities strategy, which returned 70.1%. That compares with the median return of 14.7%.

The Cohen & Steers European Real Estate Securities composite holds REITs and other publicly traded real estate companies in the United Kingdom and continental Europe. (Although the portfolio's holdings are 100% non-U.S., Morningstar includes it in the broad U.S./specialty equity category because that category encompasses all REIT separate accounts in the Morningstar database.)

Ranking second for the year was the multicap long/short strategy of Trapeze Asset Management Inc., Toronto, which returned 50.8% last year. Randall Abramson, chief executive officer of Trapeze and co-portfolio manager of the long/short strategy, said energy stocks boosted Trapeze's returns, although the composite also benefited from retail and gold stocks. In comparison, the Russell 3000 index earned 15.7% for the year.

"I believe only half of overall energy stocks were up last year, but from a bottom-up standpoint, our companies did well," Mr. Abramson said.

Some of the portfolio's top performing stocks were Pan-Ocean Energy Corp. Ltd.; Petrolifera Petroleum Ltd., which made a significant discovery in Argentina; and Eastcoast Energy Corp., which made headway in its natural gas sales in Tanzania, Mr. Abramson said. In retail, Abercrombie & Fitch Co. and La Senza Corp., the Canadian lingerie chain that was acquired by Limited Brands Inc., proved worthwhile investments.

Yet Mr. Abramson was cautious when asked whether 2007 will bring similar results.

"I would always say no," he said. "Our aim is to produce 12% returns."

Next on the list of top 10 equity/specialty separate accounts was the Cohen & Steers global realty total return strategy, which yielded a 48% return, followed by The London Co. Investment Counsel's small-cap strategy, with 42.3%. Security Capital Research & Management Inc.'s focus select real estate strategy rounded out the top five with a 42.2% return.

Jonathan Moody, director of research and co-portfolio manager at Richmond, Va.-based London Co., said the small-cap portfolio benefited from high performing stocks such as PriceSmart Inc. a members-only retail chain; Albemarle Corp., a chemical manufacturer; and Tredegar Corp., which makes aluminum extrusions. Not including dividends, the stocks were up 114%, 87% and 75%, respectively, in 2006, Mr. Moody said. The investment firm tends to be overweight in consumer staples and financials, although the top-performing stocks fell outside this category, Mr. Moody said.

Stephen Goddard, president of The London Co. and a co-portfolio manager, said the firm tends to focus on companies with good fundamentals that are natural targets of acquisitions.

"Our whole process is really about identifying companies that have very stable fundamentals, stable cash flows, so it tends to lead us away from commodities and technology and areas where there is more speculation involved," Mr. Goddard said. "We tend to do best in a late market environment when the economy is slowing because most of our positions are low-beta, higher quality type of names that tend to be targets of M&A activity going on."

The Cohen & Steers and Trapeze strategies swapped places for the five years ended Dec. 31. Trapeze Asset's multicap long/

short approach took top honors with return of 42.3%, while the Cohen & Steers European real estate strategy ranked second with 37.3%. All returns for periods of more than one year are compound annualized figures. BlackRock Inc., New York, grabbed third place with its small-cap energy composite, at 32.6%. The five-year median return was 9.1%, while the Russell 3000 index had 7.2%.

In the broad universe of U.S. stock and specialty commingled funds, the top three performers for the year were also real estate strategies, although value equity approaches also paid off. AEW Capital Management, Boston, was the top manager, with its public equity REITs portfolio raking in 37.78% ABN AMRO's North American REIT strategy was hot on its heels with 37.72%, followed by INVESCO's equity real estate securities fund with 37.5%. The median commingled fund returned 15.8% for the year.

One reason real estate investment trusts and real estate companies did so well last year is because pension funds allocated more money to such investments, and more demand increases the prices of the stocks, which in turn raises the portfolio returns, said James Trowbridge, a real estate portfolio manager at INVESCO.

Mr. Trowbridge said the INVESCO's portfolio benefited from holdings in New York, but he declined to name holdings.

He added that aside from pension funds' increasing demand for real estate investments, REITS did well in 2006 because buyers were willing to may more for commercial properties, which also has pushed prices up.

So, will real estate continue its winning streak? Maybe not. Mr. Trowbridge said that despite good fundamentals — higher occupancy rates and higher rental rates that are expected to continue this year — REITs are "starting to look fairly expensive" and are at historical highs. "So we don't think returns could be as high (in the future) as they have been in the past year."