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Real Estate Funds Still Holding Their Own

One of the things that makes America great is the fact that folks can own their own home, property or any other kind of real estate investment that they choose. One of the things that make fund investors grateful is when real estate investing pays off.

Check out the performance of real estate funds and you'll find that year-to-date, it's the only fund type within Lipper's Sector Equity Group that's showing positive returns: As of August 9, the average real estate equity fund was up 8.10 percent.

Jay McKelvey is portfolio manager of the John Hancock Real Estate Fund, (1-800-225-5291). It's one of the real estate funds that's beating the average -- it's up 10.42 percent for the year. Last year the fund did well too; up 26.4 percent.

Currently, most of the fund's assets are invested in REITs (74.9 percent) and mortgage banking (10.79 percent). A look at the fund holdings show an underweighting in apartments, retail and hotels. "We're a little concerned about the economy right now and don't expect it to turn up dramatically," says McKelvey. " If we did expect it to turn up dramatically, we would go into the hotels and retail."

Here's more from McKelvey about the John Hancock Real Estate Fund, (JREAX):

Q: Tell me more about why the fund is underweighted in things like apartments, retail and hotels?

McKelvey: First, we manage this fund conservatively. And, it's because of our concerns about the economy-- and consumer spending-- that's lead to underweighting in things like malls and retail. Now, we've been wrong to this point about consumer spending, but I just don't know how it is going to keep up.

We don't like hotels right now because hotels have one-day lease. So, hotel stocks can move dramatically depending upon how the economy is working. Right now the daily rates are going down.

And we are underweighted in the apartment sector but I'm looking to try and build up that position.

Q: Any sectors the fund is overweighted in?

McKelvey: Office and industrials. We like their longer term leases and I'd rather be in a 15-year lease than a one-day lease.

Q: What about the earnings on REITs. Aren't they slipping?

McKelvey: We're seeing some companies in certain geographic areas, Atlanta specifically, bringing down their earnings numbers because they're in a slow growth area. But in general, most of the companies have hit their numbers and some have even beaten them.

Going forward, we're expecting earnings to grow but grow at a slower pace.

Q: What are the fund's top three holdings?

McKelvey: Equity Office Property, Equity Office Residential, and the Simon Property Group. One thing they all have in common is that they are nationwide. Another is that they have very good management teams.

Q: What's it take for you to sell? Hitting your target price?

McKelvey: One of the key components that we look at is net asset value. When we first started the fund, many of these REIT stocks were trading at well below their net asset value. And in our mind, they should trade at least up to the value of the properties -- and a little higher -- because you have to give management credit for what they're doing.

So, once the stock goes over the value of their underlying properties, then we have to start to think about looking at other performers.

Our sell discipline is similar to buying and selling your own house: If we are going to sell our house and can get a higher price for it than anything else on the street, then we'd sell it and buy something else.

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