The 3 hardest-hit funds as real estate sector circles drain

Fidelity Investments, Franklin Resources Inc., and Kensington Investment Group Inc. are the biggest losers in a decline by U.S. real estate funds that wiped out $13 billion in the last three months.

Property funds, the best performers in 2006, have slumped 16 percent since May 14, the most of any category tracked by research firm Morningstar Inc., of Chicago. The $5.9 billion Fidelity Real Estate Investment Portfolio, the largest among the group, fell 19.7 percent. The $718 million Franklin Real Estate Securities Fund and the $500 million Kensington Strategic Realty Fund each dropped 20.3 percent, the most among actively managed property funds with more than $100 million in assets.

Housing prices will register their first annual decline since the 1930s as rising mortgage rates hurt demand, according to the National Association of Realtors in Chicago. Investors pulled $4.5 billion from real estate funds in the last three months, after a drop in commercial-property shares slashed returns.

Fund redemptions, combined with stock market declines, reduced assets to $66 billion as of Aug. 8 from a peak of $82 billion three months earlier, according to Emerging Portfolio Fund Research Inc., of Boston.

Investors have placed $3 billion into property funds so far this year, following returns in 2006 of 31 percent, twice that of the Standard & Poor's 500 index.

The U.S. housing slump is eroding the value of most real estate funds and threatens to slow the economy. Consumers are taking less equity out of their homes to buy furnishings, cars and other goods.

Jeremy Grantham, who helps oversee $150 billion as chairman of money manager Grantham, Mayo, Van Otterloo & Co. L.L.C., of Boston, said declines in real estate investment trusts were a result of the rout in the mortgage market. Record defaults of subprime loans, given to people with little or no credit history, have deepened the housing slump and decreased demand for REITs, which were set up for individual investors to own commercial property such as offices, malls and hotels.

The best-performing real estate fund is the $1.7 billion CGM Realty Fund, managed by Kenneth Heebner in Boston. The fund declined 6.6 percent during the last three months, reducing this year's gain to 4.8 percent. No property fund tracked by Morningstar posted a gain in the last three months.

Heebner is helped by a flexible strategy that allows him to invest in casino companies, commodities and non-U.S. holdings. BHP Billiton Ltd., a mineral-exploration company, is his second-largest position. The Melbourne-based company's shares have risen 31 percent this year. The fund's top pick is New York office landlord SL Green Realty Corp., which has declined 22 percent on the New York Stock Exchange.

Fidelity's real estate fund, managed by Steven Buller in Boston, has fallen 17 percent this year, trailing 90 percent of rival funds with a similar strategy. The fund's biggest holding is Starwood Hotels & Resorts Worldwide Inc., of White Plains, N.Y., whose shares have fallen 14 percent this year as consolidation in the hotel industry has slowed.

The Blackstone Group L.P., the New York buyout firm, said in July that it would buy Hilton Hotels Corp., Starwood's larger rival, for $20 billion.

Simon Property Group Inc., the largest U.S. owner of shopping malls, is the fund's No. 2 investment. Its shares have declined 15 percent this year.

The fund has not invested in any home builders.

Buller was not available for an interview. Fidelity spokeswoman Sophie Launay said: "The fund has had solid long-term performance."

Over the last five years, the Fidelity fund has climbed 19 percent, compared with 11 percent for the S&P 500.

Franklin's real estate fund, managed by Alex Peters and Sam Kerner in San Mateo, Calif., has fallen 22 percent so far this year, more than all other actively managed real estate funds tracked by Morningstar. The fund's holdings include home builders D.R. Horton Inc., of Fort Worth, Texas, and Lennar Corp., of Miami. D.R. Horton's stock has fallen 41 percent this year, and Lennar's shares have dropped 43 percent.

Peters was not available to comment, Franklin spokesman Matthew Walsh said.

Kensington Strategic Realty Fund has declined 17 percent this year, in part because of companies that provide commercial mortgages, such as iStar Financial Inc., of New York. Shares of iStar have fallen 34 percent so far this year as investors have become concerned that the subprime crisis would spread to corporate borrowers.

                                              Three-month

Assets              performance

Fidelity Real Estate      

Investment Portfolio       $5.9 billion         -19.7 percent

Franklin Real Estate

Securities Fund             $718 million       -20.3 percent

Kensington Strategic

Realty Fund                $500 million       -20.3 percent

SOURCE: Bloomberg NewsEndText