Kelly D. Rush |
Principal Real Estate Securities Institutional Fund
[September/October 2006]
By Jada A. Graves
Kelly D. Rush, CFA, has been a part of the real estate industry since he started at Principal Global Investors 19 years ago. “When I walked through the doors of Principal, I knew I wanted to work in the investment field, and they assigned me to real estate,” he says. Rush first dabbled in commercial mortgage loans and REIT issued bonds before a 2001 segue to managing director of the Principal Real Estate Securities Institutional Fund, a dedicated fund with $34.2 billion real estate assets under management. As of the second quarter 2006, the fund consisted of 37 real estate holdings with an average 90 percent invested in REITs.
Rush’s fund is part of the real estate group Principal Real Estate Investors (PREI) within the Principal Global Investors financial family. The Real Estate Securities Institutional Fund concentrates solely on domestic assets, while Rush says the Australian Principal Property Securities Fund (PPSF) has been a strong real estate investment vehicle on a global scale for PREI.
With the fund, Rush and his four-person portfolio team exercise an investment strategy that provides investors exposure to high quality U.S. commercial property that generates superior returns. The fund has two distinct elements, starting with a process of closely integrating real estate expertise and equity investing. “That’s from the time and knowledge I’ve spent in equity investment, and the considerable time working with Principal Global Investor’s equity group and investing in stock. I recognize the benefit of bringing in that expertise,” he says.
Second, PREI as a whole takes an approach to real estate investment that Rush explains is far more centralized than many firms. “Most of our investment personnel are in the same location, instead of being localized. It’s having the investment expertise in the same location that enables us to better research our companies,” he says.
Specifically, that investment expertise is evident in the fund’s portfolio team, which includes research analyst Matthew Richmond, who brings with him a strong background in asset management and disposition activity, and Tony Kenkel, CFA, who has worked four years with the fund and who Rush credits with institutional investment savvy. Todd Kellenberger provides support to both Rush and Richmond in asset management and, lastly, Rhonda VanderBeek handles the fund’s trading activity.
In Rush’s opinion, the Real Estate Securities Institutional Fund’s investors are attracted to the fund because of the diversification benefits REITs provide. “Relative to other forms of investment, real estate can compete in terms of giving attractive returns. It doesn’t lose step with the flexible income markets and the broader equity markets,” he says.
Rush’s fund highlights a bottom-up approach to investing, and a fundamental research based investment process. To this mission, the fund has outperformed its benchmark, the MSCI U.S. REIT Index, for the one-, three- and five-year periods, and has a 15.54 percent return as of the second quarter of 2006.
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| Data as of July 31, 2006.
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At the end of the second quarter, Principal Real Estate Securities Institutional Fund was overweighted in apartments, followed by hotels. “We see a strong demand with limited new supply in both sectors,” Rush says.
The fund was modestly underweighted in office assets. “There’s been a slow recovery in office, and our rationale with that sector, as well as other underweight sectors like specialty, net lease and health care, is that there is slower growth potential. At this point in the cycle, we believe it’s good to be underweight in these sectors,” he says.
Principal Real Estate Securities Institutional Fund’s largest underweight sector by the end of the second quarter 2006 was retail. “We are nervous about retail trends in light of the risk of slowing employment growth, rising energy prices and a slowing housing market.”
Industry Evolutions
With his background in commercial real estate, Rush can say he has witnessed the industry’s progression first-hand. He mentions two significant changes since starting with Principal in 1987. First would be a change in research methods. “Now it’s more top-down macroeconomic research, where you’re studying what’s going on with demand,” Rush says. “When I started in the industry, it was seat-of-the-pants investment. There was a lot of cyclicality and people got burned. By the end of the 1980s, the industry had become more sophisticated.”
The second change goes hand in hand with the first, and that’s the securitization of real estate. “Through the proliferation of publicly held REITs and CMBS has come more transparency: more information and better information,” Rush says. “We now have a more efficient flow and understanding of the industry.
“In the future, I really believe we’re going to see a slow migration toward an increasing percentage of ownership in a public format,” Rush continues. “The public slice of real estate will get larger. I don’t think it’ll exceed the private side, but over the long haul it will increase.”
Until those changes occur, Rush emphasizes his current levelheaded approach to managing Principal Real Estate Securities Institutional Fund is based on three rules. “One, you must have a conviction in your investment belief, because if you don’t, you’ll find yourself reacting to the market rather than being proactive in the way you manage the money,” he says. “You also have to have good judgment to surround yourself with good people. Finally, you must have a bit of a short memory. Don’t relish the good days too much, and don’t dwell on the bad days either. You have to stay steady and not overreact to investors’ decisions. That can be applied to other parts of life, too.”
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