By Courtney Darby
*Data as of Sept. 10, 2003 unless noted
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In this issue, we profile Kensington Select Income Fund. Fund co-manager Joel Beam shares his thoughts on market returns, favorite sectors, investment insights, and what sets his fund apart from other dedicated REIT funds. Beam also provides a bit of his personal experience and how he became interested in the industry.
The fund invests in real estate securities, primarily REITs, but it may also invest in regular C-corporations and master limited partnerships. Its main focus is the senior securities sector, namely preferred stock and debt. However, the allocation to each is adjusted based on market conditions, according to Beam.
Predicting where market conditions are headed is always a challenge. However, Beam is optimistic about REIT returns over the next 12 months and beyond.
"It’s always difficult to predict what the market will do over the near term, especially since there was such a strong rise in the market over the first half of the year," Beam says. "Nevertheless, we expect long-term returns in broad market equities to be in the range of 7 percent to 10 percent. REITs historically have done a little better than that."
REITs saw an increase in new capital during the recent recession as investors sought a safe haven from broader market struggles. However, Beam does not think an overall market recovery would diminish the amount of new capital flowing into REITs.
Beam |
"A substantial market rise has already happened in the first half of 2003, and real estate stocks enjoyed a simultaneous rise. We believe that underpinning the interest in our sector is a demographically driven move toward stocks that provide a combination of income and principal protection," Beam says. "Plus, a lot of retail investors remain cautious and conservative following the end of what Warren Buffett called ‘the Great Bubble.’ A lot of money was lost by people who only expected gains."
Beam says the fund’s strategy is not sector focused, but he does have his preferences.
"This fund is really a fixed-income alternative and our investing on behalf of the fund is very much a credit-focused endeavor. So sectors matter, but they’re perhaps not as governing as they might be for an equity fund," Beam says. "That said, we favor what we believe are the most stable sectors–net-leased properties, retail and commercial lenders."
As for specific companies, Beam likes ProLogis (NYSE: PLD), Simon Property Group (NYSE: SPG), Boston Properties Inc. (NYSE: BXP) and Pan Pacific Retail Properties (NYSE: PNP) to produce strong results over the next 12 months.
"Since outperformance is a relative measure, we think the strongest performers will be those companies with the best management, assets and balance sheets," Beam says. "Nevertheless, given the recent run up in prices, from an absolute point of view, the best near-term returns may come from companies that take advantage of M&A opportunities."
Beam says he tries to differentiate Kensington Select Income Fund from other REIT funds based on its value-oriented approach and experienced fund managers throughout Kensington Investment Group.
Overall, Beam is always looking for unique characteristics to determine investment-worthy REITs.
"We look for evidence of competitive advantage and development of a real franchise, because these will sustain value growth over time," Beam notes. "We also look for companies where the interests of management and shareholders are aligned with one another."
As for his own interests, it was the unique characteristics of commercial real estate that drew Beam to the industry.
Sector
Breakdown
(Top 5 Industries Held) |
| Industry |
% of Portfolio |
| Office |
28% |
| Diversified |
19% |
| Retail |
15% |
| Mortgage |
12% |
| Hotel |
10% |
| Top Five Holdings |
| Company |
% of Assets |
| iStar Financial (Preferred Series A) |
7.3% |
| American Financial Realty Trust |
6.0% |
| iStar Financial, Inc. |
4.3% |
| HRPT Properties Trust (Preferred Series B) |
3.9% |
| Anthracite Capital Inc. (Preferred Series C) |
3.8% |
"I started as an intern with Liquidity Fund Investment Corp. from 1991 to 1993 doing property appraisals and then securities analysis on real estate securities," Beam recalls. "Commercial real estate intrigued me and as I learned the business and gained more responsibilities it was a natural progression. I wanted to make a difference and that means delivering superior returns and service for clients."
What Beam enjoys most about being a fund manager is working closely with his clients, building a trusting relationship with them and getting to know the talented people running the companies in Kensington’s sector.
