It may seem oversimplified, but portfolio manager Scott Blasdell says that his strategy for selecting companies for the American Century Real Estate Investments Fund is to own cheap stocks. So far that strategy has worked, as the fund ranked 17th in Lipper's real estate mutual fund rankings for five-year annual total return and was named a Lipper Leader for asset preservation.
The American Century Real Estate Investments Fund's aim is long-term capital appreciation through a no strings attached, bottom-up stock picking approach. Blasdell uses a dividend discount model to achieve that goal. The model ranks what stocks are most attractive based on specific criteria, including projected cash flow and dividends. Through this process, Blasdell whittles out the lowest ranking stocks and picks the highest ones for the fund's core holdings.
"We look to identify a few key pieces of information for each company, such as projected cash flow and the dividend each company will pay out over the next seven years," Blasdell says.
The fund's approach has allowed it to successfully maintain a long-term performance focus and track record, which can be seen in its Lipper rankings. Although American Century ranks in the lower percentile based on its 2004 one-year cumulative total return, it ranked significantly higher over the three and five-year periods.
According to Blasdell, the portfolio consists almost entirely of REIT securities because REITs fit well with the dividend discount model, and other property-related stocks don't have the value REITs do.
"Currently this model works particularly well for REITs and better than for other sectors of the stock market. At this time, we do not think valuations of non-REITs are compelling enough to justify any major investments," Blasdell says.
Simon Property Group (NYSE: SPG) is the fund's top holding at 8.2 percent of the portfolio. Blasdell says that Simon was an attractive purchase because of the price paid for Chelsea Property Group at the time of the acquisition.
"We already owned Chelsea and thought Simon was getting a great deal," Blasdell says.
Kimco Realty Corporation (NYSE: KIM) is another key holding in the portfolio at 5.2 percent, and a favorite of Blasdell's.
"Kimco has done a brilliant job of developing non-REIT businesses and making its foray into the asset management business," Blasdell says. "I'm comfortable with their outlook, and Kimco should enjoy an above average growth rate because they don't require much capital to operate."
While REIT stocks have already seen some price volatility in 2005, Blasdell is cautiously optimistic for the year ahead.
|
Top 5 Sectors |
| Sector |
% of Portfolio |
| Office |
23.5% |
| Apartment |
17.5% |
| Regional Retail |
16.5% |
| Industrial |
12.1% |
| Strip Centers |
9.1% |
|
| 5 Largest REIT Holdings: |
| Company |
% of Portfolio |
| Simon Property Group |
8.2% |
| ProLogis |
6.1% |
| General Growth Properties, Inc. |
5.7% |
| Kimco Realty Corporation |
5.2% |
| Equity Office Properties Trust |
5.0% |
|
"Obviously there is some risk, especially if long-term interest rates go up," Blasdell says. "If rates don't go up and inflation stays down, it looks like REITs will be trading in line with the private market value. Given where valuations are, we aren't expecting a lot of appreciation. Most of REITs' total return will come from the dividends."
Blasdell also says that any well-diversified portfolio has room for REITs.
"If you choose to invest in REITs, you should do that as a long-term investment," Blasdell says. "The best thing to do is buy them and then not pay attention to them for awhile."
Given Blasdell's assessment of the REIT market, he is particularly bullish on the apartment and regional mall sectors.
"I think we are going to see an economic recovery in the apartment sector, so we have positions in Archstone-Smith (NYSE: ASN) and Essex Property Trust, Inc. (NYSE: ESS). We've also put positions in companies that need job growth to do well, like Camden Property Trust (NYSE: CPT) and Prentiss Properties Trust (NYSE: PP)," Blasdell says. "And although regional malls outperformed in 2004, they will still stack up well through 2005."
