Last week I took a look at an obscure yet successful small-cap fund called Royce Pennsylvania. This week I’m going to again focus on a specialty fund but in real estate. You are probably thinking there is no way you’d invest in real estate with all of the gloom and doom predictions about the real estate market. Believe it or not, there is more to real estate than residential housing and some areas are still expanding rapidly. The fund today is called CGM Realty (CGMRX).
- Manager: G. Kenneth Heebner (13 year tenure)
- Min. Initial Investment: $2,500 / $1,000 in IRA
- Front-Load: None
- 12(b)-1 Fee: None
- Expense Ratio: 0.92%
- Net Assets: $1.47 billion
- Median Market Cap: $5.6 billion
- Turnover: 136%
Manager Ken Heebner combines his macroeconomic outlook with industry and company-specific analysis to form this portfolio. Heebner looks for companies that are attractive based on P/E and growth rates. The fund is often concentrated in relatively few industries. At times, turnover is high, as the fund adjusts quickly to changing opportunities.
While past performance is no indication of future returns it is hard to ignore this fund’s outstanding returns.
Clearly when comparing to the S&P as a benchmark the numbers are significantly higher, but that doesn’t matter since this fund has no business being compared to the broad market. What is more important is the performance relative to a reality index which it typically beats easily. With a 5-year annualized return of over 35% it certainly would have been a nice addition to any portfolio in hindsight.
The reason this fund has performed so well overall and relative to its peers is because of active management. We typically focus on funds that are not actively managed for their low costs and simplicity, but in this case the opposite is true. Manager Ken Heebner moves rapidly in and out of the industries he believes are poised for the best returns. While this has proven to be a successful strategy in the past it is also worth noting that if Ken makes a bad prediction it could also adversely affect performance. This strategy also leads to a lot of turnover which makes this fund a better candidate for a tax-deferred account.
A Morningstar analyst stated:
It’s also worth noting that Heebner makes big bets beyond real estate stocks, and those wagers can shift quickly and dramatically. In recent years, the fund’s 20% non-real-estate stake has been successfully invested in homebuilders or energy stocks. The June 30, 2006, portfolio shows a more-recent enthusiasm for commodities miners, such as Southern Peru Copper PCU.
- No front or deferred load
- Relatively low expenses compared to peers
- Outstanding past performance
- Stable management
- Willingness to go beyond pure real estate stocks may help returns when the subsector falls out of favor
- Carries above average risk due to reliance on real estate
- Lacks diversification across asset class
- High turnover resulting in significant capital gains distributions
The Bottom Line
Clearly this is a specialty fund that should only make up a small portion of your portfolio, but if you are looking for some exposure to real estate this could be a great option. Management has experience in predicting trends and moving investments around to take advantage of opportunities. This fund is not for the faint of heart, but the small minimum initial investment will allow investors to get their feet wet without assuming too much risk.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.