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Phoenix-Duff & Phelps Real Estate Securities Fund

Real Estate Can Be Rewarding Provided Know Where To Look

Low interest rates may real estate look like a wise investment, but when it comes to investing in real estate investment trusts (REITs) you've got to know where to look to hit pay dirt.

Michael Schatt, portfolio manager of the Phoenix-Duff & Phelps Real Estate Securities Fund (800-243-4361) since 1998, has been a pro in the real estate arena for decades, and likes to invest in larger-cap REITs because of their liquidity. There is also a value bent to his investment style that, over time, has paid off for the fund's shareholders.

This year, the fund's total return was up over 10.3 percent through May, 15, beating the performance of the average real estate fund by more than 30 basis points. Over the past five years ending March 31, 2003, the fund ranked No. 2 in performance, according to Lipper.

Their are 13 different property types that make up the REIT universe, including office, industrial, apartments, manufactured housing, regional malls and shopping centers. Typically, you'll find between 25 and 40 stocks in the Phoenix-Duff & Phelps Real Estate Securities Fund (PHRAX) portfolio---all of them equity REITs.

Here's more from Schatt about the fund:

Q: Real estate investment trusts kick off dividends. How important are those dividends?

A: Dividends are really an inherent part of the REIT structure. So, if you're not interested in dividends, I don't see why you'd be interested in REITs since they are required to pay out 90 percent of their net taxable income in the form of dividends.

Q: How many different kinds of property types are there within the REIT universe.?

A: There are 13 different property types. That would include office and industrial, apartments, manufactured housing, regional mall, shopping centers, etc.

Q: How do you choose the companies that wind up in your fund's portfolio?

A: We measure our internal allocation decisions against the NAREIT (National Association of Real Estate Investment Trusts) Total Return Equity Index. That is a market-cap weighted index and, what we do is express our targets in the form of over-weight, market- weight, or under-weight to that index. So, three of the sectors that we are currently over-weighted in--- compared to the NAREIT Total Return Index--- are regional malls, shopping centers and industrial REITs. We are dramatically under-weighted in apartments, office and lodging at this point.

Q: How important are interest rates to REITs.

A: It's very hard to divorce the impact of interest rates on the real estate business, in general. For instance, we are under-weighted in apartments right now. One of the reasons is that they are losing out on the competition to single-family home buyers. One of the reasons that they are losing out in that competition is because interest rates are so low and that encourages more people to own a home. So, in that way, interest rates have an impact on our decision to under-weight apartments.

Interest rates also have an impact on apartments because it encourages merchant builders, who are in the business of building apartment complexes and then selling them off to investors, to continue building even though the demand has fallen for apartments. That, too, has an impact on the general health of the apartment REITs.

Q: What about commercial property?

A: If you're talking about office buildings, there is more (actual) space than there is demand for space right now.

Q: Can you give me an example of some of the REITs you own and why you like them?

A: Here's the way we look at the business: We think that we're investing in real estate but not just the hard assets. We look at it as investing in the hard assets that are being professional run by local management. And have senior management who is setting a strategy that uses the tools of the balance sheet all to pursue value creations. So, we focus on companies who understand that.

Companies that we like and are holding include CenterPoint. It's an industrial REIT. Their portfolio is almost exclusively in Chicago. Another is the Chelsea Property Group---they are a premium outlet center developer and have a loyal following. Their first overseas venture will be in Japan. And the Simon Property Group, a popular mall developer.

Q: What are the risks to REIT investing right now?

A: The biggest risk, not just in our fund but in REITs in general, would be a dramatic rebound in the investor's interest in the broader market. If investors become interested in growth again, there's a good chance that they could significantly abandon the REIT sector.

Q: What's the best thing that could happen to the REIT market?

A: Jobs. Jobs are what's going to grow the demand for the product in this sector. You've got to have jobs in order to stimulate consumers; you've got to have jobs in order to create a demand for office space; and you've got to have jobs to create a demand for apartments.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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