Where do you see major market returns heading over the next 12 months?

Laura Sloate: The most important thing that people must bear in mind is that the economy is not going to be the mid-single digit growth economy that we saw in the ’90s. It’s going to be a low-growth economy and a slow tortuous return, but we’re on the way back. The markets are extremely volatile and returns are all over the place. I think the better option for investors in the intermediate term is stocks compared to the bond market.

Do you see another dip for the market as a whole?

Sloate: I’m always paranoid. I think you always have to be careful. We live in a world of terrorism, globalism and very instantaneous translation of an event into the marketplace. Horrible things can happen. I’ve been in the market 34 years, nothing surprises me anymore.

How do REITs fit into your investment strategy?

Sloate: If you look at mortgages and real estate combined, they are probably the single biggest assets in America—the underlying infrastructure of the country. REITs are an inflation hedge (not mortgage REITs); most properties will appreciate over time. Real estate has a longer horizon than other stocks and REITs are a total return stock. The income component is very important in the returns generated by a REIT.

What REIT sectors do you favor and why?

Sloate: Right now I only invest in one retail and one office company. Retail has shocked me with how well it has done, and that makes me nervous. Most of the retail REITs are trading at or above their NAVs. As for the office sector, I own Vornado Realty Trust (NYSE: VNO)—which is among the very best REIT managers in the country. Vornado’s performance is helped by being concentrated in the two best office markets in the country, New York and Washington.

Have you traditionally had a higher allocation in REITs?

Sloate: There are times I have had a higher allocation. We’re a stock-picking firm so we go stock by stock. We own Vornado and New Plan Excel Realty Trust (NYSE: NXL). I think that they both are the best of their class, so you have the least risk. They each have a good profile, a very liquid balance sheet and very good management.

An economy that looked like it was really firing up would make me buy more REIT stocks. In the apartment sector, housing starts are beginning to slow down significantly, which sends the marginal house buyer back to the rental markets. I used to own Plum Creek Timber Company, Inc. (NYSE: PCL), but sold it before they cut the dividends. I still think Plum Creek is a very well managed company and it remains on my radar screen.

Are there any individual REITs that you think will significantly outperform over the next 12 months?

Sloate: I think Vornado could do pretty well. Also, it may be a little premature, but I think in three to six months the apartment REITs, like AvalonBay Communities, Inc. (NYSE: AVB), could be strong. Another area where we might find outperformance is in the industrial REIT sector.

What other industry sectors do you favor?

Sloate: The sectors I favor now are consumer discretionary, energy, oil service and natural gas exploration. I favor consumer discretionary because the consumers have always brought the economy out of recession. In spite of everybody having called them dead in the last 20 years, I think that once again the consumer will bring the economy out of this recession. I think we’ll see some increase this fall.

Sector Breakdown (Top 5 Industries Held)
Industry	% of Portfolio
Financial	14.8%
Consumer Discretionary	12.8%
Energy	11.8%
Industrial	7.8%
Consumer Staples	6.4%
REIT Holdings*
Company	% of Assets
Vornado Realty Trust (NYSE: VNO)	3.6%
New Plan Excel Realty Trust (NYSE: NXL)	1.2%
*Holdings as of July 31, 2003