Think fast: Which mutual fund category posted the best returns in 2012? Red-hot India funds? Rejuvenated financial-sector funds? The correct answer is, believe it or not, global real estate funds. The 53 funds in the category, most of which invest in foreign real estate investment trusts and other property companies, returned an average of 31.8% for the year. That’s a remarkable improvement from 2011, when the funds posted double-digit losses because of worries about global economies.
Asian property stocks, a drag in 2011, led the rebound in 2012. Chinese property stocks, for instance, surged 98% last year, and real estate shares in Singapore jumped 65%, according to the FTSE EPRA/NAREIT indexes.
The top two no-load funds in the category outran their peers by a wide margin: Forward International Real Estate (symbol FFIRX) gained 53.7%, and Fidelity International Real Estate (FIREX) climbed 43.9%. Both benefited from what wasn’t in their portfolios: U.S. stocks. That’s because the global real estate category includes funds that invest in U.S. and foreign REITs, and a few, among them the Fidelity and Forward funds, that invest only in foreign stocks. And although property-owning U.S. REITs performed well in 2012 (delivering an average total return of 18.0%), overseas property stocks did even better.
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Forward manager Michael McGowan tilts toward small and midsize companies. Plus, he says, he limits his universe to firms in a handful of cities he knows well, including Hong Kong, Montreal and Manila.
Guillermo de las Casas, the Fidelity fund’s manager, favors growing companies that are trading at bargain prices. Small and midsize concerns account for half the fund’s assets; large companies make up the rest.
You’d have to be wildly optimistic to expect foreign property stocks to deliver a repeat performance in 2013. Even so, de las Casas says, “I can absolutely still find value” in foreign REITs. “Many of the stocks are still below their 2007 highs.”
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