Real-estate mutual funds are ringing up impressive gains for the fifth year in a row, but some experts fear the sector's foundation will soon show some cracks, according to a report in The Wall Street Journal.
These funds primarily invest in a portfolio of real-estate investment trusts, or REITs, that own properties like hotels, apartments or office buildings and pass rental income on to shareholders. Real-estate funds lost money during the tech mania of the late 1990s, but thanks to REITs' attractive yields and modest price tags, real-estate funds — typically pitched as humble portfolio-diversification tools — averaged a whopping 17 percent annual gain over the past five years, compared with a nearly 2 percent annual loss for the Standard and Poor's 500-stock Index, according to Lipper Inc.
The funds have taken in more than $12.6 billion in new money since the end of 1999, when the category had less than $9 billion in assets, according to Boston fund consultant Financial Research Corp.
But REIT shares aren't nearly as cheap as they were a few years ago. That has some investors worried, particularly because the Federal Reserve Board has started raising its target short-term interest rate and, when rates tick up, some risk-averse investors switch to fixed-income securities. The Fed is expected to bump up its target rate again next week.
So far this year, real-estate funds are up an average of more than 12 percent. But they seem vulnerable to bad news. Fears of rising interest rates knocked the funds down more than 13 percent in April, their worst one-month loss is more than two decades, according to Lipper.
Another concern stems from the popularity of the funds. Some worry that the gush of money into these funds could leave just as quickly if the sector falters, causing an even sharper decline in REIT shares.
