FUND WATCH


Third Avenue Real Estate Value Looks Abroad

Jeffrey R. Kosnett

This excellent real estate fund now scouts for growth in Britain and Asia. There's every reason why its noted discipline can travel well.



You wouldn't think you would want to talk up a fund that's up only 1% during this year's bountiful stock market. But it's been a tough year for real estate stocks, so Third Avenue Real Estate Value merits applause for that seemingly humble gain. Moreover, the fund is preparing for better results in the years ahead.

Manager Michael Winer looks for growth rather than income when he picks stocks. Now, he is undertaking a major revamping of his fund, turning it from a mostly domestic fund to a balanced, worldwide real estate portfolio. Winer, who has managed the fund (symbol TAREX) since its 1998 creation, says categorically that his strict discipline is the reason. If "there was enough to buy in the U.S., I would have continued to do so," he says.

But with a groaning $3.2 billion in assets, he's had to look for better values in British and Asian real estate. He's been filling up with such unfamiliar as Henderson Land Development, Wharf Holdings, Hang Lung Properties and Mitsubishi Estate. Third Avenue still has 60% of assets in U.S. stocks, but that understates the fund's overseas exposure, because some of its biggest domestic holdings are worldwide developers and investors, such as ProLogis, which owns a slew of FedEx and DHL warehouses on the outskirts of every big airport on earth. Winer remains upbeat about his favorite U.S. land and development stocks, Forest City Enterprises and St. Joe, as well as a company to the north, Toronto-based Brookfield Asset Management.

The back story is that there has been an explosion of publicly traded real estate stocks in much of Europe and Asia. In Britain, for instance, the government authorized the issuance of U.S.-style real estate investment trusts beginning this year. In other countries, real estate investment and development companies have gone public in recent years, and many trade at share prices below the value of the underlying properties' assets.

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In the U.S., by contrast, most REITs trade at or above the value of their assets, despite a stiff drop in share prices since last February. Most U.S.-oriented real estate funds are in the red so far this year, while foreign-leaning property funds are scoring solid gains. For example, Alpine International Real Estate (EGLRX) was up 16% year-to-date through July 23, and Cohen & Steers Asia Pacific Realty A (APFAX, 4.5% sales charge) rose 13%.

As befits its composition, Third Avenue Real Estate's performance has been in between. In the second quarter, a difficult one for U.S. REITs, Third Avenue lost less than 2%, while Vanguard REIT Index, which, as its name suggests, tracks a REIT benchmark, surrendered more than 9%. Also helping Third Avenue hold up in a difficult REIT market is Winer's unwillingness to invest in the large domestic REITs that dominate the holdings of U.S. realty funds.

If you see real estate as a growth industry rather than a source of dividends or just want a property fund to add a dash of diversification to your portfolio, Third Avenue is a fine choice. Over the past five years through July 23, the fund returned an annualized 24%, according to Morningstar. That beats the DJ Wilshire REIT Index by an average of four percentage points per year. Annual expenses of 1.11% are below average relative to other real estate funds.




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