By Jada A. Graves
Extensive research and an experienced investment team are key ingredients to fund managers Mark Howard-Johnson and David Kruth's investment strategy with the Goldman Sachs Real Estate Securities Fund. Howard-Johnson and Kruth average 20 years experience in real estate investing, with 10 years working in the public markets, and they are supported by a seasoned team of fellow portfolio managers and research analysts with real estate, broad equity and fixed-income experience.
"We're all cycle-tested—most of us have lived through very lean and then fat times in real estate and understand what's happening in those markets," Vice President and Senior Portfolio Manager Kruth says.
What that experience has fostered is a real estate fund with an average return of more than 30 percent per annum over the past three years, Managing Director and Senior Portfolio Manager Howard-Johnson says.
Howard-Johnson oversees the real estate securities team as well as managing the office, industrial, apartment and self-storage sectors of the portfolio. He is also the co-head of the real estate securities team for Goldman Sachs Asset Management (GSAM), the asset management arm of the Goldman Sachs Group, Inc. Kruth concentrates on the retail and hotel sectors, while also overseeing the fund's investments in Canada and heading the team's global effort.
Launched in 1998, the Goldman Sachs Real Estate Securities Fund was created with three goals in mind, according to Howard-Johnson; first, to exceed the Wilshire Real Estate Securities benchmark; second, to generate attractive risk-adjusted returns; and third, to generate strong performance relative to its peers.
"Through successfully leveraging the extensive real estate-centric resources we have here at Goldman Sachs, we've done what we wanted to do," Howard-Johnson says.
The fund has exceeded its own expectations, appearing in or near the top quartile of the Lipper fund rankings for one, three and five-year returns. The GSAM team manages more than $2.1 billion overall, with $627.1 million in the Real Estate Securities Fund as of June 30. Of the fund's assets, more than 85 percent of the holdings are in REITs with the balance in real estate operating companies (REOCs).
The fund managers say the Goldman Sachs Real Estate Securities team creates in-depth earnings models on each and every company in the portfolio. This analysis is complemented by Archon, a wholly owned subsidiary of Goldman Sachs Group, Inc. Archon provides fundamental research on all the major markets across the United States.
The use of Archon is part of GSAM's competitive advantage, Howard-Johnson says. He explains that Archon uses the same third-party resources employed by other companies, but then takes that information to draw its own conclusions by utilizing the extensive locally based network of managers and operators. Those conclusions of Archon's analysis are then provided to GSAM's real estate securities team on a proprietary basis.
GSAM uses an investment strategy of choosing the real estate companies with the best value and growth prospects, as well as choosing which companies are heading into the right part of the real estate cycle.
"An example of this would be Starwood Hotels & Resorts (NYSE: HOT), which is our second-largest holding," Kruth says. "Among the many reasons we hold the shares is because it's in an early recovery sector, but more importantly, it's in the right strata in that sector. Currently, hotels are leading the way in fundamentals growth post 2002. It's built lots of traction because of strong demand in an environment where there is very little new construction. What we've seen, and expect to see, is very strong business trends with growth in occupancy and room rates leading robust earnings growth. With Starwood's sector-leading brands over pending European expansion, we expect outperformance for the foreseeable future."
| Top 5 Sectors: |
| Sector |
% of Portfolio |
| Retail |
24.8% |
| Office |
22.9% |
| Residential |
13.6% |
| Hotels |
13.5% |
| Diversified |
9.9% |
| 5 Largest Holdings: |
| Company |
% of Portfolio |
| Starwood Hotels & Resorts |
6.7% |
| Simon Property Group |
6.5% |
| ProLogis |
5.3% |
| Vornado Realty Trust |
5.2% |
| General Growth properties |
4.9% |
| All data as of June 30, 2005, unless otherwise noted. |
"The same can be said for ProLogis (NYSE: PLD)," Howard-Johnson adds. "It's in the right part of the real estate cycle, with domestic occupancy rates improving, and a large and growing international component. For example, it has gone from no investment in Japan to probably around $2 billion in assets by the end of this year. It has a great management team, and we think, on a relative basis, represents the best value in the sector right now."
Kruth and Howard-Johnson say all the members of the fund team are dedicated to real estate, and many of them have expertise in specific components of the market, all of which work toward the most complete assessment for GSAM.
"When looking at retail REITs for example, we spend a lot of time with fixed-income analysts who understand what those companies are doing, from a credit perspective," Kruth explains. "And our equity desk trades small-cap value stocks, so we'll get a lot of information on companies from them."
Howard-Johnson says the majority of GSAM's performance has been generated by stock picking through a fundamental stock selection process. The fund managers say this method has led to strong, consistent returns over the long term since the fund's launch in 1998.
GSAM recently introduced a global property securities strategy at the end of 2004. Howard-Johnson says he believes that it is a natural evolution of business as more countries offer REIT-like structures and as the companies themselves become more globalized. "You are now unable to run a successful U.S. real estate securities fund without global information," Howard-Johnson says.
Kruth adds that part of one's future success in investing in the sector will be dictated by the level of global resources available and the ability to leverage those resources effectively. "With a team of more than 20 people based locally across the world combined with the broad experience of the U.S. team, we believe we have a compelling competitive advantage."
With all the emphasis on research and experience in GSAM's performance strategy, size is another key component, Howard-Johnson says. "We're still a relatively small manager. We've got just over $2 billion under management as of June 30. Many of our competitors have significantly more. It remains our belief that it's a small-cap world. If you are too large it becomes very difficult to outperform the benchmark consistently through a full cycle. We will shut the fund down when we start feeling that pressure. We're very sensitive to capacity issues.
"For six of the seven calendar years we have outperformed the index on the gross of fee basis," Howard-Johnson continues. "We think that's a good batting average and hope to continue that."
