Analysis of Fidelity Real Estate Investment Portfolio
analysis, mutual fund

A recent fund profile in Barron’s features the Fidelity Real Estate Investment Portfolio (FRESX). This $4.2 billion fund sports a relatively low 0.8% expense ratio and a 28% turnover. According to the article, the fund’s manager

For 18 years, […] has successfully navigated through real estate booms and doldrums, beating two-thirds of his peers over 15 years, and 85% over five.

The primary prospectus benchmark for the fund is the S&P 500 Index. The secondary, and a more relevant, benchmark is the Dow Jones U.S. Select Real Estate Securities Index. While there is currently no ETF available that tracks this index, one of close long-lived approximations is the iShares U.S. Real Estate ETF (IYR). Alpholio™’s calculations show that since July 2000, the fund returned more than the ETF in about 89% of all rolling 36-month periods.

An alternative reference for the fund is the SPDR® Dow Jones® REIT ETF (RWR). Since September 2001, the fund returned more than this ETF in about 52% of all rolling 36-month periods.

Yet another reference for the fund is the Vanguard REIT ETF (VNQ). Since October 2004, the fund outperformed that ETF in less then 26% of all rolling 36-month periods. However, in all three comparisons only total returns but not risk of the fund and ETFs were taken into account.

Let’s take a closer look at the performance of Fidelity Real Estate Investment Portfolio on a risk-adjusted basis. Applying Alpholio™’s patented methodology, a reference portfolio of ETFs is constructed to mimic the fund. In the simplest variant of the methodology, the reference portfolio has both fixed membership and weights. This type of analysis shows that since late 2004, the fund produced around minus 0.15% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had just four equivalent positions in the iShares Cohen & Steers REIT ETF (ICF; constant weight of 51.2%), SPDR® Dow Jones® REIT ETF (RWR; 24.8%), Vanguard REIT ETF (VNQ; 21.3%), and iShares Transportation Average ETF (IYT; 2.8%).

In a more elaborate variant of the Alpholio™ methodology, the membership of the reference ETF portfolio is fixed but weights can fluctuate over time. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Fidelity Real Estate Investment Portfolio (FRESX)

Since late 2004, the fund’s cumulative RealAlpha™ has been largely flat to negative. The annualized discounted cumulative RealAlpha™ was around minus 0.1%. At about 26%, the fund’s standard deviation was 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.13.

The following chart illustrated changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Fidelity Real Estate Investment Portfolio (FRESX)

The fund had only four equivalent positions in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 40.9%), iShares Cohen & Steers REIT ETF (ICF; 35.4%), Vanguard REIT ETF (VNQ; 20.9%), and iShares Transportation Average ETF (IYT; 2.8%).

Over the past ten years, the truly risk-adjusted performance of the Fidelity Real Estate Investment Portfolio was unexceptional. Although the fund’s expense ratio is low compared to an average of its category, active management did not add any value. The fund could have easily been substituted by a combination of just a few major real-estate ETFs. It is also symptomatic of a defunct methodology that the article emphasizes comparisons of the fund’s performance to that of its peers (who collectively underperform benchmarks) rather than to ETF alternatives.

To learn more about the Fidelity Real Estate Investment Portfolio and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Real Estate Fund
analysis, mutual fund

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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