T. Rowe Price Real Estate fund has been on a tear. By Katy Marquardt, Staff Writer October 9, 2006 It may seem odd that real estate funds are producing scintillating results amid a slowing housing market. But the apparent contradiction unravels when you consider what makes property funds tick. For the most part, they hold large stakes in real estate investment trusts, or REITs, which typically focus on the commercial real-estate market -- an area that is still going strong. This partially explains why T. Rowe Price Real Estate is blowing away every other fund on the Kiplinger 25, the list of our favorite no-load funds. What's more, T. Rowe's 30% return over the past year, through September 30, places it among the top 10% of all real-estate funds. Driving the fund's blistering performance has been an "unusually" large number of takeovers, says David Lee, who has managed the fund since its 1997 inception. "We make long-term buys where we see value," he says. "But those in private equity saw value as well." At the end of 2005, for example, Lee was buying shares of Trizec Properties, a large Chicago-based REIT that had just bought a slew of Southern California properties from Arden Realty. But in June, Trizec announced that it was selling its own business to a partnership formed by Brookfield Properties and private-equity firm Blackstone group. That sale, valued at $7.2 billion, was completed on October 5. Acquisitions can provide a short-term performance boost, but they don't really don't jive with Lee's long-term strategy. "We rarely make investments based on takeout potential and prefer, instead, to view our investments as long-term partnering from which we hope to experience recurring benefits for many years," Lee wrote in the fund's recent semi-annual report. He added that he remains optimistic about "property-level fundamentals dictated by real estate supply and demand factors." Lee, who keeps the fund well-diversified by geography and property type, looks for proven management teams that are good at investing capital. "We want business models that we believe can thrive and prosper in the long run," Lee says. The fund can hold REITs or real estate operating companies, but Lee tends to focus on REITs, which provide greater yield. The fund (symbol TRREX; 800-638-5660) currently yields 2.6%.