Today’s story in Barron’s profiles the T. Rowe Price Real Estate Fund (TRREX). This $4.6 billion no-load fund sports one of the real-estate category’s lowest 0.79% expense ratio and minimal turnover of only 1.5% as of the end of May 2014.

According to the article

…the premise … is pretty simple: Give investors long-term exposure to commercial real estate and in such a way that they can sleep at night. The fund has delivered on that promise with average annual returns of more than 11% a year over the past 15 years, better than 80% of its peers. More impressive, perhaps, is that it has done so with relatively little volatility.

The following chart shows that, on an annualized return basis, the fund slightly outperformed its average peer and its prospectus benchmark:

TRREX Performance vs. Benchmarks

However, this does say anything about how the fund performed on a truly risk-adjusted basis. To discover that, let’s use the Alpholio™ methodology. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for TRREX

Since early 2005, the fund’s cumulative RealAlpha™ has been largely flat to negative. In other words, after a thorough adjustment for risk and after fees, the fund added hardly any value for its shareholders. As a matter of fact, the annualized discounted RealAlpha™ for the fund was a negative 0.10-0.20%. Moreover, over the entire analysis period the fund exhibited a relatively high annualized volatility of almost 27%, while its reference ETF portfolio’s volatility was about 1.1% lower.

The following chart shows ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for TRREX

The fund’s top three equivalent positions we in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 35.6%), iShares Cohen & Steers REIT ETF (ICF; 29.6%) and Vanguard REIT ETF (VNQ; 26.2%). The additional ETF positions, which further help explain the fund’s returns, had a collective minority weight of only 7.6%.

Thanks, in part, to a low-turnover strategy, the T. Rowe Price Real Estate Fund has been quite tax-efficient. However, it also failed to outperform a dynamic combination of just three major REIT ETFs, which enabled an easy substitution of the fund. In fact, the current composition of the fund indicates that its top-ten holdings, which collectively constitute almost half of its assets, are also popular positions in these ETFs. Hence, based on the above analysis, investors have little incentive not to choose the latter investment vehicles as alternatives to the fund.

To learn more about the T. Rowe Price Real Estate and other mutual funds, please register on our website.

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