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BNY Hamilton Global Real Estate Fund: The Great Communicators
[May/June 2008]
By Allen Kenney
Even though there are countless real estate companies around the world, the investment professionals at Urdang Securities Management who oversee the BNY Global Real Estate Fund (Nasdaq: BGBIX) have identified at least one indicator of success that they say transcends geographic boundaries: the ability to communicate.
"Great management teams around the world all come from the same gene pool," says Todd Briddell, managing director and chief investment officer for Urdang Securities Management. "The ability to communicate their story consistently to an investor base is important. People gain comfort in their strategy and have appropriate expectations for what the company can and cannot do."
Briddell co-manages the BNY Global Real Estate Fund along with Urdang colleagues Peter Zabierek, senior portfolio manager of international real estate securities, and Dean Frankel, senior portfolio manager of U.S. real estate securities. Zabierek maintains that good communication skills are equally vital in a REIT fund manager's line of work.
"Communicating the real estate securities story to the market is probably the biggest challenge," he says. "We get the question, 'Is this investment real estate, or is it a stock?'"
The answer, of course, is that REITs are both. But that's a message that the average investor doesn't always grasp immediately, according to Zabierek.
"That communication process takes a little bit of time," he says. "Once investors understand what they're getting themselves into, we've seen over the last seven years that the amount of fund flows towards REITs is extremely positive."
From Top to Bottom
Like many investment professionals, the BNY Global Real Estate Fund's managers, who are headquartered in the Philadelphia suburb of Plymouth Meeting, Penn., say they are looking to "generate alpha"—investor-speak for producing returns that beat the general market's. Overall, the BNY fund aims to "kill it with consistency," in Briddell's words, by exceeding the returns of the FTSE/EPRA NAREIT Global Real Estate Index annually by 200 to 450 basis points. Meanwhile, the fund aims to match those same measuring sticks' levels of volatility.
"We don't want to be closet indexers," Briddell says. "At the same time, year in and year out, our volatility numbers are right in line with our benchmarks."
Introduced at the end of 2006, the fund focuses almost exclusively on global real estate companies' equity securities. Typically, the fund strives to have between 50 percent and 60 percent of its total assets in non-U.S. companies, spread across at least 10 countries. The fund tends to concentrate on developed countries, although the managers do have the authority to invest in emerging markets.
In general, Urdang's investment professionals adhere to a blueprint for success that they say keeps the fund running.
"The key thing to understand about us is the way that we balance 'top-down' and 'bottom-up' decision-making," Briddell says.
By top-down, Briddell is referring to the more general factors that influence the fund's allocations, such as favored property sectors and regions of the world. The fund might opt to overweight its allocation to a certain country relative to the benchmarks. At the end of 2007, for example, 19 percent of the fund's total holdings were in Hong Kong, while the FTSE EPRA/NAREIT Global Real Estate Securities Index had allocated 16 percent. So, if that country's performance bests the benchmarks' expectations, then the fund generates higher returns.
The second part of the managers' equation—the bottom-up aspect—involves the actual stock picking. Following the lead of their top-down decisions, the managers begin to target actual companies. For example, if Briddell and his crew identify outsized opportunities in the Japanese industrial sector, they'll begin to target attractive J-REITs accordingly.
In general, Briddell says, the resulting mixture of desired outperformance should consist of one-third top-down calls and two-thirds bottom-up decisions, blended with a little volatility damping.
The formula tends to produce concentrated portfolios with fewer holdings than the typical global real estate fund. Usually, the BNY fund holds between 55 and 70 stocks. Among current top 10 holdings are Mitsubishi Estate Company Ltd. (OSA: 8802), Simon Property Group (NYSE: SPG) and The Westfield Group (ASX: WDC).
From the Ground Up
Urdang tries to back up its top-down, bottom-up investing style with meticulous research. Besides using proprietary metrics to gauge the value of a company's assets and its price relative to the market, Urdang's investment team places strong emphasis on face-to-face meetings and in-person visits to see a company's assets.
"We're constantly reminded to be grounded in fundamental analysis, where cash flow and balance sheet strength are key, and, therefore, reading into 10-Ks and 10-Qs and doing our own due diligence are the hallmarks of our investment process," Briddell says.
"We're focused on good management teams," Zabierek adds. "We spend a lot of time, energy and travel budget going out to meet not only the CFOs and CEOs, but also the people on the ground who are managing the asset."
Of course, a small team of fund managers couldn't possibly have the time to visit hundreds of real estate companies in all parts of the globe. That's where Urdang's relationship with worldwide commercial real estate services firm NAI Global comes in handy. NAI's network of 8,000 brokers around the globe provide support for the BNY fund, meeting and analyzing companies in both established markets and potential real estate hot spots.
"We have boots on the ground in every country in the index and beyond," Zabierek says. "They're helping us anticipate where the index might go and, in some cases, make investments that are somewhat beyond our borders, but definitely very quality real estate. Just because the index doesn't go there doesn't mean that we shouldn't."
Briddell notes that his investment management team can contact experienced NAI personnel around the world to help them understand local customs and trends. "It's like having an ambassador in every country," he says.
Building Excitement
Like many of their brethren in global real estate, Bridell and Zabierek are attracted to the exciting opportunities that abound abroad. Consequently, they've tried to establish an international securities team with an emphasis on diverse backgrounds, drawing heavily from the nearby Wharton School. They note, for instance, that their staff speaks seven different languages fluently.
As a result, they feel that they've created a "young, entrepreneurial, fun culture" around the office, according to Zabierek. That combination of youthful enthusiasm and veteran investing savvy provides a major advantage when it comes to global investing.
"When we go to places like Vietnam or Malaysia, we see how the real estate market is evolving," Briddell says. "I'm excited about the opportunity to do everything we've done historically on the U.S. side and take some of the best practices and apply them on a global scale. As a U.S. REIT fund manager who has been tracking this market for a long time, it's similar to knowing how the final chapter turns out before you start the book."
Still, venturing into foreign markets can add new twists to a familiar story, the Urdang managers contend. That's the allure of their job, according to Bridell.
"The bigger the playing field, the greater the complexity level," he says. "It's a challenge, and it's a challenge that I very much enjoy."
Allen Kenney is Portfolio's Staff Writer.
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