Active Management Pays Off in Real Estate Funds
REIT manager Cohen & Steers outshines its index fund rivals.
Cohen & Steers, which has been managing real estate investment trusts since REITs were first created in the 1980s, is beating index fund rivals as many have been hard hit by problems in the retail sector.
With active stock managers under continued pressure from low-cost index funds, niche firms such as Cohen & Steers have used specialized expertise and fundamental research in sectors like real estate and energy to outperform benchmarks. Although Cohen & Steers Realty Shares has seen losses this year, its benchmark fared worse. And it’s outperforming with high single-digit gains over the past three years.
Realty Shares, Cohen & Steers’ flagship fund, lost 3 percent in the 12 months through July, according to Morningstar and FactSet. The fund’s benchmark, the FTSE NAREIT Equity REITS Index, lost 4.5 percent over the same period. Over the past three years, Realty Shares gained 9.1 percent annually even after investors paid fees, compared to the index’s gain of 8.8 percent and 7.7 percent returned by peers.
Joe Harvey, president and chief investment officer of Cohen & Steers, says the fund outperformed its benchmarks because its managers began lightening up on the fund’s exposure to retail about a year ago, something index funds, by definition, can’t do. In the fairly slow-moving real estate sector, managers can cut back on companies that will be hurt by big trends, such as the shift by consumers away from shopping in stores to buying online.
A year ago, Cohen & Steers’ U.S. team studied big retailers, many of whom are anchor tenants of malls, and the challenges posed by online shopping.
“We did research on the retailers, not on real estate per se,” said Harvey. “The conclusion was that the clock was ticking on the financial viability of many of the large tenants in regional malls. That’s what gave our managers the conviction to get underweight.”
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Harvey, who joined Cohen & Steers as a REIT analyst in 1992, says the firm’s approach to beating peers and benchmarks has changed over time. Twenty years ago, when the publicly traded real estate sector was still new with fewer competitors, he says that Cohen & Steers could get a bigger information advantage on a company’s prospects with fundamental research than it can today.
“At that time, just by virtue of going out and visiting a company, you would learn things that we’re very investable,” said Harvey. “We’ve had to up our game.”
Cohen & Steers now integrates risk-management techniques into its investment process, so it can confidently buy undervalued securities during market downturns, and it has built up macroeconomic research capabilities.
“The market has become much more macro where factors like momentum or value have come to dominate the markets for periods of time,” he said. “We need to know what we might be vulnerable to.”
With pressures on all active managers, Cohen & Steers has also established goals and measurement techniques to make sure it is expressing “conviction” in its portfolios.
Increasingly, investors want their funds to have higher conviction, which is often measured by active share, or the percentage of a fund’s holdings that differs from the index. If investors are going to pay higher fees for an actively managed fund, they want to make sure it looks a lot different from cheaper index funds.
Active share for Cohen & Steers’ Realty Shares fund was 33.4 percent in 2012, rising to 48.7 percent on March 31.
“Higher active share is something that by definition an index fund can’t provide,” Harvey said.