FUNDVIEW-Top-performing US fund focuses on unloved real estate

Wed Nov 21, 2012 1:20pm EST
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By David K. Randall

NEW YORK Nov 20 (Reuters) - During a 2009 trip to Hong Kong, mutual fund portfolio manager Michael McGowan came across two 40-story office towers nearing completion in Kowloon East, a formerly industrial ne i ghborhood across the bay from the city center, that were renting space for about HK$10 ($1.30) per square foot per month.

"They were these beautiful buildings, and I thought, 'Wow, this is so cheap,'" said McGowan, who manages the $135 million Forward International Real Estate fund. The buildings had come to market at double that price, but the rates were cut to draw tenants in the midst of the financial crisis.

McGowan was struck by the award-winning design of the two glass towers, as well as a nearby commuter train station that made them attractive to businesses looking to escape rents of up to HK$150 a square foot per month in Central Hong Kong. After the trip, he bought shares in Wing Tai Properties Ltd, the real estate investment trust that owned the buildings.

That and other similar bets have paid off. The buildings rent for up to HK$35 per square foot now, and Forward International is up 48.2 percent through the end of October, making it the top performer this year among mutual funds tracked by Lipper, a Thomson Reuters company.

The fund's returns are more than 10 percentage points better than those of its closest competitor, the Alpine Cyclical Advantage Property Fund, and it has vastly outperformed the benchmark Standard & Poor's 500 index, which was up 13.1 percent over the same period.

McGowan attributes his performance to a two-pronged strategy: on one hand, he invests in REITs with properties in and around gateway cities such as Hong Kong and London, which have long histories as business centers and cultural capitals and are relatively constrained geographically by rivers, mountains or oceans. He also plays defense by increasing his holdings in less glamorous markets, such as Canada's resource-rich Alberta province.

San Francisco-based McGowan said he adopted this approach in 2009, after his fund fell as much as 51 percent in the wake of the financial crisis, as real estate collapsed. The fund is up nearly 50 percent for the three years since but down 4.27 percent over five years, about the middle of the pack in its category.