Sep. 5, 2007 (Investor's Business Daily delivered by Newstex) --
After an absence of several months, real estate funds moved back into August's penthouse. With a 4.46% gain on average, they reclaimed the top spot among sectors, according to Lipper.
It was their first top finish since January. It ended a three-month skid in last place.
Among all sectors, real estate was hurt the least by latest fallout from the subprime lending meltdown and credit crunch. It had already had a meltdown of its own, having skidded 11.21% the past three months to be down 7.48% for the year. That's the worst among sectors.
Investors figured out that most real estate funds' holdings weren't hurt in August by the residential mortgage-oriented crisis, said Richard Imperiale, manager of the $51million Forward Progressive Real Estate Fund FFREX.
'Guilt By Association'
"Before August, the sector was hit with guilt by association," Imperiale said. "There was no distinction between those stocks that really had (negative) issues and those who were innocent bystanders."
Segments that rallied best off July lows were office, industrial and health care real estate investment trusts.
Corporate Office Properties OFC soared more than 16% in August. The REIT's properties cater mainly to government contractors in the Washington, D.C.-Baltimore corridor. "Their tenant base is high quality," Imperiale said. "And earlier this year they got oversold. But they have no negative operating issues."
Apartment REITs lagged. Investors worried that homes and condominiums in or heading to foreclosure will wind up back on the market as rentals. That would dampen apartment rent levels.
Retail REITs occupied middle ground. "Investors worried about the economy and financial health of consumers," Imperiale said.
He sees commercial real estate firms doing well the rest of this year. "They're comfortable about meeting operating objectives," Imperiale said. The outlook beyond that is cloudier, he added. A slowing economy would hurt. History is working against the sector. "The sector's never gone this long without a downturn," he said.
Vital Signs
Sectors that scored August gains owed it mainly to strong second halves of the month.
Health care funds averaged a 2.76% advance last month.
The sector was hit by the credit crunch less than most others, said Jordan Schreiber, senior manager of $430 million BlackRock Healthcare Fund MAHCX.
Smaller health care companies, mainly biotechs, outperformed large drug makers. Many large pharmaceuticals firms are facing patent expirations on key drugs. That fosters a sellers market for biotech firms that develop new treatments, Schreiber said.
"As patents expire, there's a shift to generics," Schreiber said. "That helps pharmacy benefit managers."
His fund owns all three major PBMs. One, Express Scripts (NASDAQ:ESRX) ESRX, jumped 9.22% last month.
Schreiber said the outlook for the sector hinges in part on the economy. The more GDP slows, the more attractive the sector will look to investors.
But a Democrat-controlled Congress and White House could create costly regulatory and pricing problems for drug makers, he said.
Tech funds posted a 2.22% gain on average in August.
The sector initially was dragged down by the overall market malaise. But investors warmed to the sector, reassured by the fact that many tech stocks, especially larger caps, have lots of cash on their books, don't overuse debt and borrow relatively little, said Tom Telford, manager of $125 million American Century Technology Fund ATCIX. Many also are seeing increasing portions of their revenue come from overseas.
The sector is in the early phases of a broad rally, Telford says. Many stocks were rebounding from lows set in the wake of the bursting of the Internet bubble in 2000.
The sector has clear drivers now, he added. A key one involves mobility and the convergence on wireless devices of applications for everything from music to data and voice.
"Another reason we're seeing growth is that the overcapacity in (telecom) infrastructure created during the buildout of 1998 through 2001 has finally been absorbed," Telford said. "Service providers are spending again to build capacity."
Research In Motion RIMM is a beneficiary of both increased mobility and the convergence trend. It soared 17% last month, leaping out of an early-month correction.
"I expect tech to continue doing well," Telford said. "The mobility/convergence trends should continue. The battle among cable and telecom companies should continue. Spending on information technology is accelerating."
