Buller |
Fidelity Real Estate Investment Portfolio
by Jada A. Graves
[May/June 2006]
Real estate investing is typically best viewed as a long-term proposition. When it comes to actively managed dedicated real estate funds, they don't come much more long-term than the Fidelity Real Estate Investment Portfolio (FRESX). The fund, managed by Fidelity vice president Steve Buller, launched in November 1986 and is the second-oldest active real estate fund tracked by Lipper. With the fund's longevity has come patience and a better understanding of the real estate market, Buller says.
"We have a very methodical process that we go through. Our research process includes scrutinizing a company's fundamentals, management and assets, followed by a balance sheet analysis and comparison to valuation tools," Buller says. "Every company that we follow is one we have frequent contact with, not only in their offices, but through visiting their properties on an evaluation type basis."
The fund has 52 holdings, an 89 percent REIT allocation, and $618.6 million in total net assets, as of Dec. 31, 2005. According to the fund's prospectus, it seeks above-average income and long-term capital growth.
"We definitely market and position the fund as a mainstream REIT fund with moderate risk that is trying to outperform its benchmark and peer group," Buller says.
Tracked against the S&P 500 primarily, as well as the Dow Jones Real Estate Securities Index, the Fidelity Real Estate Investment Portfolio has had a history of outperformance. The fund posed better than a 13 percent year-to-date total return as of Mar. 31. According to Buller, Fidelity's consistency can be explained in two ways—one, Fidelity's moderate risk, and two, he and the team of analysts he works with do not discriminate in their holdings and are willing to adapt to the trends in the industry they see coming.
"We're willing to look at all market cap sizes and invest in all types in this sandbox of real estate securities," Buller says. "Our decisions are driven by what we see in the REIT market and where the securities are trading, as well as what we're anticipating."
Buller says the fund is currently overweight in the industrial sector for two reasons. "One, there is a play on global trade, and a need for high distribution facilities throughout the United States and the world. Secondly, more than any other sector, the industrial companies have driven their business model to a higher return on invested capital. Now, they are not only involved in the ownership of buildings, but they are active in the fund management business, so they can arguably trade at a higher multiple."
Fidelity Real Estate Investment Portfolio currently underweights the office sector due to the underlying lease structures. "Many of these companies have rent roll down with their five- to seven-year leases. Although office fundamentals are improving, it is happening more gradually," Buller says.
Forging Fidelity
Joining Fidelity Investments in 1992 after completing business school at the University of Wisconsin, Buller worked as an analyst in the High Income Group, focusing on distressed and bankrupt securities. Having previously managed the Fidelity Select Environmental Services Portfolio, he took over as portfolio manager of the Fidelity Real Estate Investment Portfolio in 1998.
Until recently, Buller was also the portfolio manager for the Fidelity International Real Estate Fund, now managed by Matthew Lentz.
In addition to the Fidelity Real Estate Investment Portfolio, Buller also manages Fidelity fund entities outside the U.S.
According to Buller, there are three things that excite him about managing real estate funds.
"One, I think you can add a tremendous amount of value to the process of outperforming your peers and your benchmark. We devote quite a bit of resources to the research process itself, hoping to add higher returns than our shareholders would receive in a more benchmark-oriented vehicle.
"I'm also excited that the real estate universe has seen tremendous growth," Buller continues. "There are more names and more market capitalization to invest in now. And lastly I'm excited that in the time frame since I first started running the fund, REITs have come a long way in being recognized as an accepted asset class with the income component and return potential that many desire to have in their investments today."
Buller and his fund-manager predecessor, Barry Greenfield, envisioned more publicly traded real estate holdings for Fidelity, something that Buller says came to fruition in the 1990s.
A prospective Fidelity investor, both then and now, has realistic return expectations when investing in REITs and wants to use the fund for its diversification benefits and the income component, Buller explains. "Our investors want to include REITs in their diversified portfolio, and are interested in investing for a long period of time," he says.
At the same time, Buller warns investors not to misinterpret the recently high returns as any indication for the long-term. "What worries me a lot is that we have such above average returns that people get complacent and expect the same over a long period of time, whereas a lower return should be more expected. We don't want overestimations of what real estate returns can deliver, because this level cannot be sustained. Some people will be disappointed, others will be thrilled, but we can't promise things that the buildings can't deliver," he says.
Looking Ahead
Having been in the real estate securities business for quite some time, Buller has seen the investment industry evolve. One of the latest evolutions—globalization—he says has many facets that will ensure it's a hot industry topic for quite some time.
| Top Five Holdings: |
| Company |
% of Portfolio |
Starwood Hotels & Resorts
Worldwide, Inc (NYSE: HOT) |
8.55% |
| ProLogis: (NYSE: PLD) |
8.37% |
| General Growth Properties, Inc. (NYSE: GGP) |
6.77% |
| Simon Property Group, Inc. (NYSE: SPG) |
6.64% |
| Equity Office Properties Trust (NYSE: EOP) |
6.38% |
| Data as of 12/31/2005 |
"There are a lot of little subtexts under globalization. It's not just REIT structuring, but also the securitization of real estate, the competing structures, the demands of the investor base, and how retail investors intend to use REITs," he says.
Of the increasing privatization of the industry, Buller says he has noticed the shift from private buyers not only picking up assets, but also snagging the acquired company's management team and platform as well. "These private buyers have a tremendous amount of capital still to employ, and they need the experienced people. These very talented real estate people are coming at a premium today.
"A slight challenge for the future could be that as the number of REITs starts to plateau and then possibly shrink, you'll end up with a phenomenon where there are fewer REITs to invest in," Buller says of more public-to-private transactions. "But that is only a slight challenge that might not happen, and for now to some extent it's still cheaper to buy on Wall Street than Main Street."
"In general, I'm very excited about the potential of REITs through growth of the industry itself. What also excites me everyday is working with a hugely talented group of analysts and having the ability to take their best ideas and exploit their knowledge base."
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