Elsewhere, the fund has broadened its scope by investing in SPAC-related real estate. SPACs, or special-purpose acquisition companies, are publicly traded shell companies that exist solely to raise money to buy or merge with private companies with actual businesses—and then take them public. SPACs have taken the investment world by storm but have produced a mixed track record in share price performance. Kolitch says his foray into these vehicles is limited, but carefully constructed.
“We’ve developed a prudent strategy for participating in real estate-related SPACs,” he says. “We’re partnering with highly regarded real estate sponsors such as Fifth Wall, which is the premier property technology venture capital firm in the country, led by Brendan Wallace. We’ve also invested with Scott Rechler, a well-known real estate investor at RXR Acquisition Corp., and with Tishman Speyer Innovation Corp.
“One SPAC-related company we’re very optimistic about is Smart Rent, which is sponsored by Fifth Wall,” he adds. “[Smart Rent] is the category-leading smart home automation platform. It’s a software company that enables connected homes.”
All-Weather Approach
Despite the Baron Real Estate Fund’s chart-topping returns over three-, five- and 10-year periods in Morningstar’s real estate category, this year is a different story, as its 17.9% return (through August 31) put it in the category’s bottom quartile.
“No question about it, we’re more like an equity approach to investing in real estate. There will be more volatility in our year-to-year performance than in more dividend-focused strategies,” Kolitch says, referring to the dividend-oriented approach of REITs and funds that focus on them. One such fund is the Baron Real Estate Income Fund, which he also manages.
The Baron Real Estate Fund, on the other hand, he characterizes as an all-weather product that can perform well in different real estate cycles and economic conditions.
“The fund’s flexibility means it can pivot away from REIT or non-REIT categories facing long-term cash flow or rent occupancy pressures,” Kolitch says. “And our differentiated approach enhances our potential to generate strong returns in various macroeconomic environments.
“If investors are willing to invest like we do, which is looking out over a three- to five-year period or longer, there might be a year of volatility or underperformance,” he adds. “But the merits of our strategy will shine bright over a multiyear period.”