AIM Management may not yearn to be the next Donald Trump. But the Houston fund group is taking the plunge into the small but expanding world of closed-end real estate funds.
This sector may have less than $15 billion in assets, but because real estate funds have outpaced most other equity sectors, they have increasingly attracted investors' attention, and, more importantly, their assets.
AIM has registered with the Securities and Exchange Commission to launch the AIM Select Real Estate Income Fund, a new closed-end real estate fund that will invest primarily in real estate investment trusts (REITs). The fund will also be able to borrow against its assets.
The institutional asset management unit of INVESCO Funds of Atlanta will serve as the fund's sub-advisor. INVESCO already manages its own proprietary real estate fund with a modest $21.2 million in assets, according to Lipper of New York. AIM and INVESCO are both subsidiaries of AMVESCAP of London.
This is a rather unusual move for AIM, which already manages the $105 million open-end AIM Real Estate Fund, and has never been a dominant player in the closed-end fund arena.
The new real estate fund will become AIM's only traditional closed-end fund. AIM's one other closed-end fund is the $366 million AIM Floating Rate Fund. But that product is an interval fund that doesn't trade on a stock exchange in a secondary market, and it allows only periodic tender offers.
The firm liquidated the only two other closed-end funds it has ever offered several years ago, according to Lipper. AIM closed the AIM Strategic Income Fund in 1996 and the AIM Eastern European Fund in 1999.
AIM is one of the very few fund advisors to stake out a location within the closed-end world of real estate funds. Only four other closed-end funds invest exclusively in real estate investment trusts or real estate operating companies.
AIM declined to comment, citing the quiet period before the fund is declared effective by the SEC.
Competitive Offerings
Cohen & Steers Capital Management of New York, a pioneering niche real estate investment advisor, has had a monopoly on the real estate sector. Cohen & Steers is the sponsor of three closed-end real estate funds and four open-end real estate funds. Collectively, Cohen & Steer's closed-end funds have more than $1.2 billion in assets, while the open-end funds account for another $2.6 billion, according to Lipper.
Nuveen Investments of Chicago, a veteran closed-end fund sponsor, became a competitor to Cohen & Steers in the real estate sector last November, when it launched the closed-end Nuveen Real Estate Income Fund. The fund, which is sub-advised by Security Capital Research & Management, also of Chicago, raised more than $371 million.
"We had been looking at real estate for awhile," said Bill Adams, executive vice president in charge of the development of structured products at Nuveen. "We have a long track record with income-oriented exchange-traded funds, and real estate lent itself to this [format]," Adams said.
Moreover, closed-end funds in general are attracting much more attention from investors because of the increased transparency now available via informational Web portals such as www.etfconnect.com, Adams said. The seven month-old site is co-sponsored by Nuveen and a unit of Thomson Financial, the company that publishes Mutual Fund Market News.
In contrast, the open-end universe of sector real estate funds is much broader, and more competitive, with 74 retail and institutional funds currently available from 56 different fund companies, according to Lipper. The newest entrant to the real estate sector is Neuberger Berman Management of New York, which last week launched its first real estate fund, the Neuberger Berman Real Estate Fund.
"The open-end, no-load structure is the perfect structure for Neuberger Berman," said Steven Brown, portfolio manager of the new fund. Brown, in fact, joined Neuberger in January from Cohen & Steers because of his real estate experience, he said. But while Neuberger currently manages about $1 billion of its overall $62 billion in REIT securities, the firm previously had no separate REIT-focused investment vehicle for either its mutual fund investors or its private asset management clients, Brown said.
So why is the real estate market so appealing to fund advisors now?
To start with, sector real estate funds have done well over the last three years, while broadly diversified equity funds have tanked and certain sector funds have melted down.
Over the trailing three years ending April 26, funds in the real estate sector have come in fourth place in the equity fund performance derby, returning an average of 11.7%, according to Morningstar of Chicago. Open-end real estate funds were outpaced only by small value funds, which returned an average of 17.4%; small blend funds, which returned 15%; and natural resource funds, which rewarded investors with an average 12.8% gain.
More recently, real estate funds have delivered even stronger performance. Year-to-date through April 26, the average real estate fund's gain of 8.8% has outpaced all other equity fund categories except small-cap value funds and natural resource funds, according to Lipper.
Moreover, when compared to other formerly high-flying sector funds, the real estate sector's outperformance is striking. Over the same year-to-date period, health and biotech funds lost an average 12.8%, science and technology funds declined by 17.1% and telecommunication funds sank a whopping 25.8%, according to Lipper.
Neuberger's Brown expects that the REIT sector could see returns of between 12% and 14% annually for the next few years.
In addition, fund advisors have seen those enticing returns paying off in increased interest among investors. That has translated into a flood of assets. According to Lipper, assets across all open-end real estate funds have increased a respectable 68% over the past 27 months, from $8.7 billion at year-end 1999 to $14.6 billion as of March 31, 2002.
And that asset growth may be accelerating. In the four months from December 2001 through March 31, 2002, real estate funds took in a sizeable $1.25 billion.
"Investors are seeking cautious exposure to equities along with a cushion of current income," said Don Cassidy, senior fund analyst with Lipper.
The current environment, which has hurt many equity securities, has favored value stocks and has kept interest rates very low, Cassidy said. Such an economic climate bodes well for real estate funds as a sector, he said.
However, "when the economy and market are roaring, real estate funds slip down the list of what is desired," Cassidy added.
