The media tells us that residential real estate is in recovery, with Money magazine declaring on its April cover that “Housing Is Back!” Investors who want to get in on this recovery, however, need to pick their funds carefully.

Few funds specialize exclusively in housing and residential real estate, but those that do enjoyed nice returns last year and are expected to enjoy even fatter returns this year.

Fidelity’s Select Housing and Construction Fund (FSHOX), for example, enjoyed a 38 percent return last year, and Baron Real Estate (BREFX) gained 42.6 percent, according to Morningstar real estate analyst Robert Wherry.

Holger Boerner, who manages the Fidelity fund, says that housing cycles typically last anywhere from five to 10 to 12 years.

“We are in the early stages of a housing recovery,” Boerner argues, “after five plus years of imbalance between housing supply and housing demand, driven by a lot of overbuilding, I think starting in the early part of 2011 and strengthening through 2012, we’ve seen these factors go into much more of an equilibrium.

“In some areas of the country with a lot less housing supply, we’ve seen demand for residential real estate pick up dramatically,” he adds. Boerner has been with Fidelity for six years. He focused on commercial real estate for much of his time there and in the last 16 months he’s focused on residential real estate.

The existing supply of new homes should be bought up in about four-and-a-half to five months, he argues. “Whenever that number drops below six months, it becomes a seller’s market,” he says. In parts of the country, including sections of California, Phoenix, Miami and Orlando, Fla., the threshhold is closer to two to three months, he adds.

Unemployment rates have come down in many areas and that’s a favorable driver, combined with record low mortgage rates. Boerner expects positive returns for the rest of 2013. So what is Borner investing in and why?

At the end of the fourth quarter, FSHOX was heavily invested in home building firms Toll Brothers and Lennar, and in home improvement retailers Home Depot and Lowe’s.

“Both companies have seen very favorable trends as it relates to improving the value of one’s home,” he says.

Tobias Welo manages Fidelity’s Select Industrials and Select Materials funds. He’s been at Fidelity for seven years. Select Industrials and Select Materials holdings include United Technologies, which owns Carrier Air Conditioning and Otis Elevator; Honeywell, which does a lot in security, energy efficiency and fire safety systems; Cummins, an engine supplier;  PPG Industries, makers of paint; and International Paper, which makes the indispensable container board boxes needed to ship all manner of building supplies. Container board boxes are of course used by those moving in and out of new and used homes.

“These are all companies that build the products that allow you to build a home,” Welo says. “Just as important as these plays are, there’s a natural evolution that goes from a housing cycle to a non-residential cycle, which typically occurs nine to 15 months after the residential cycle gets started.

“You go down to Texas or Arizona or Nevada and you experience these big housing developments, you need to put in the strip mall, the school. So I also own a lot of these non-residential construction plays as well,” Welo says.

“I want to anticipate the next trend and be ahead of the curve. I never want to react, and some of the evaluation characteristics of some of these companies look very attractive, so I have both residential and non-residential positioning in this fund,” he says.

“We can make a good case as to why company A will have good growth this year because of housing. We can also make a pretty good case as to why they’ll have good growth next year as non-residential gets added to the housing.”

Wherry at Morningstar says stock in Toll Brothers, Lennar and even carpet maker Mohawk all had a nice run-up last year,“and I think that’s reflected in why FSHOX enjoyed a 38 percent return last year.”

“The problem with some of these select funds is they’re concentrated and have reasonable fees, but it’s so narrowly focused, you’d have to debate what you needed it for in an already diversified portfolio,” he cautions.