Have You Considered Real Estate Mutual Funds

Category: Finance, Financial Planning.

Income is hard to come by these days. The bond market is in disarray, credit spreads are widening( meaning the price of existing bonds is declining) and there are serious liquidity issues( which also impact value) .

Treasuries are yielding less than 5% . Have you considered Real Estate mutual funds? Now, let s be clear on this. Many have current yields in the 5- 8% range( primarily REIT- Real Estate Investment Trust- funds) . These are equity funds and equity funds carry greater risk, and have greater volatility, than bond funds. (Of course, investors in subprime mortgage funds have found out that debt funds are not without risk! ) However, equity funds also offer the potential for increasing income and capital appreciation. I selected two top performing funds: CGM Realty and Cohen& Steers Realty Focus I( Cohen& Steers are the godfathers of real estate funds) .

Real Estate mutual funds cover a lot of territory and you want to make sure you know how your fund invests. Take a look at their holdings. The Cohen& Steers fund s largest holdings are all US REITs. CGM s biggest holdings include two international mining companies, two real estate brokerage companies and one Real Estate Investment Trust. Both are excellent funds but they have very different investment strategies. The moral to this story is that you have to drill down into a funds portfolio to make sure it s right for you. (In addition to looking at the stocks it owns, be sure to check to see if the fund uses leverage to enhance its return. ) Income oriented investors should focus on REIT funds( although I ve avoided REITs that invest in mortgages for the time being) .

CGM is more capital appreciation oriented where as Cohen& Steers is more income oriented. REIT stocks, have declined more, in general in price during the current market correction than has the Dow or S& P 50Some argue that Real Estate Investment Trust stocks were overvalued. Historically, this has been a good entry point. Whether or not that was true, many high quality REITs are now yielding in excess of Treasuries. Of course, many high quality Real Estate Investment Trusts are still yielding in the 2- 4% range, so the correction in the REIT market may not be over. On balance, this appears to, though be a good time for income oriented investors to own REIT funds. And, one of the drivers of REIT stock prices- buyouts by private equity firms- may be ending.

Pick a good fund and you ll get high current income and an investment whose value and income stream will increase over time.