After plummeting 46.63% in 2008, real estate mutual funds outpaced the S&P 500 by seven percentage points in 2009, delivering an average of 30.34%. This year, however, managers of these funds expect only modest, single-digit gains.

Perhaps the most telling harbinger of things to come for real estate mutual funds in 2010 was the recent report that existing home sales fell 16.7% in December to a seasonally adjusted annual rate of 5.45 billion, down from 6.54 million in November, which had held steady from the month before. In addition, the homebuyer tax credit expires this spring, and unemployment remains high.

“The bounce in the real estate market has pretty much run out of steam,” Adam Gould, senior portfolio manager at Direxion Shares, told Investor’s Business Daily.

And Joel Beam, manager of the Forward Select Income Fund, which delivered 80.83% in 2009, making it the year's top-performing real estate fund, said: “We made some good decisions through the financial crisis, but the fund isn’t designed for that kind of return. It’s meant to return 9% to 10%, with most of it coming from dividends.”

A recent report from Deutsche Bank concurs with the managers’ assessments, predicting gains of 5% to 10% for real estate funds in the coming year.

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