Real estate investment trusts, or REITs, often swim against the stock market tide. That happened in 2013, when the FTSE NAREIT All Equity REIT Index had a total return of 2.86%, while the S&P 500 returned 32.4%. The contrarian tendency worked in the group’s favor in 2014, however, when REIT returns of 28% were more than double those of U.S. large-cap stocks.
With the threat of rising interest rates casting a shadow on the real estate market, 2015 proved to be a challenging year for the group. Nonetheless, equity REITs ended the year with a 2.83% return, while the S&P 500 was up only 1.3%.
Given the unique nature of REIT returns, a lot of investors might wonder what 2016 is likely to bring. David Lee, who manages the T. Rowe Price Real Estate Fund, makes it clear he isn’t going to provide any answers. Instead, he prefers to focus the discussion on those individual securities in his $5.6 billion fund that have helped it deliver average annual returns of 11.25% over the last 15 years, a record that beats 77% of its peers.
Like many other funds in the T. Rowe Price lineup, this one aims to lead the pack over the long term by hitting a lot of singles rather than batting for home runs, and keeping expenses low. To do that, Lee invests mainly in the higher quality, better-known players in the industry who are aided by high barriers to competitors’ entry and by what he considers desirable properties, and he typically holds on to these names for several years.
When describing the approach, he invokes a variety of well-worn synonyms for “boring.” “Shooting down the middle of the fairway.” “A sleep well, eat well portfolio.” “Steady Eddie.” Morningstar analyst David Kathman echoed that assessment in a report last year, which noted, “While [the fund] has seldom been among the best performers in any given year, it has mostly avoided big losses and has managed to outpace its peers in a wide variety of market conditions.”