In this issue, Fund Focus takes a look at the Brazos Real Estate Securities Fund, a dedicated real estate fund. The fund primarily invests in common stocks (97 percent), but has the flexibility to use preferred stock and is not leveraged. The Brazos team seeks to provide a balance of income and capital appreciation by investing primarily in small-cap real estate companies. The fund’s objective is to take advantage of the liquidity, control, alignment of interest and enhanced diversification offered by real estate securities.
Where do you see major market and REIT returns heading over the next 12 months?
John Meder: As with broader market returns, that will depend upon how a number of factors play out over the next year; most importantly the economy but also interest rates and their impact on supply and demand for real estate. Barring any unusual developments, we would expect mid to high single digit returns, comprised mostly of dividend yields and just a little capital appreciation on top of that, as the market looks toward 2004 earnings.
Which real estate sectors do you favor right now, and are there any you are looking at to outperform in the next six to 12 months?
Meder: Our investment process has always been driven by bottom up, fundamental analysis on a company-by-company basis, with top down sector work being used to validate the results of our bottom-up work. Fortunately, the result of that process was an overall more defensive posture the last couple of years, which aided our performance.
At this point our research is pointing toward a bit more of a recovery, hence a bit more aggressive overall posture. Specifically, that means some of our more defensive positions such as health care and retail overweights will likely be coming down while reducing our underweights in office and adding to our multifamily weightings. Lodging, while certainly benefiting from any economic recovery, has a number of significant challenges that make it too early to tell where we are headed.
Other than traditional metrics, are there any unique characteristics you look for in the REITs you invest in?
Meder: Since the very beginning, we have built our management process largely around the very research intensive process our firm and its predecessors have used for over two decades in managing smaller capitalization equity portfolios. Among other things, we spend an inordinate amount of time visiting with the companies we invest in, both before we ever own a share and all the while we own the security. Besides ensuring that management’s interests are truly aligned with ours and those of our investors, we believe that the close level of scrutiny helps us understand a company’s overall strategy and execution of that strategy well before it shows up in the numbers.
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| *Holdings as of March 31, 2003 |
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