International Real Estate & Diversification

Last week I wrote a post about the potential for diversifying the risk of the real-estate portion of our portfolio by investing in funds targeting international real estate. This weekend I spent some time researching the topic and I have two conclusions:

1. Surprisingly Few Options - I was fully expecting to find dozens of funds investing in international real estate markets. Instead I found a surprisingly small number of funds investing in this asset class, and many of these funds are either brand new, or just a few years old.

2. High Costs - The few options that I was able to locate seem to be on the expensive side, and most are actively managed. Costs and active management seem to go hand in hand.

Out of all the investment options I found I researched the following funds in detail: EGLRX (expense ratio: 1.17%); RWX (expense ratio: 0.6%); FIREX (expense ratio: 1.12%); IIRAX (expense ratio: 2.01%). Of these, only RWX is an ETF seeking to track an index. The rest are actively managed mutual funds. Alpine International Real Estate (EGLRX) is the only one of these that has been open for longer than a couple of years. RWX for example, has only been in business since December 2006.

Of these four I was most intrigued by EGLRX - it has been in business for about 18 years, it is well diversified across countries, the fund manager has been with the fund since its inception, and over the past 5 years the fund has shown very impressive average returns of 29.93%. But herein lies the problem. I have a distinct feeling that this impressive run cannot continue and that it is fueled by the cheap and abundant supply of global credit. Buying at this point feels a little bit too much like buying at the top of a very steep roller-coaster. To top this off, I examined EGLRX's historical returns. Take a look at this crazy chart. It seems like the fund was basically flat for years and years before blasting off in 2003. My spidey sense is tingling.

RWX is an ETF trying to track the DJ Wilshire International Real Estate Index - an index comprising of 158 stocks, weighted by market cap. It seems that a wide range of countries are represented in this index, but I was not able to ascertain their relative weights. As mentioned earlier, this fund is also very new, having launched in December of last year. I think that this ETF has some potential and I will continue to research it.

As a bottom line, I have decided to stay on the fence for now. I will continue to track this sector, specifically RWX and EGLRX, and will probably make a decision in the next few months. I will keep you posted.

For those of you who think that my strategy feels a lot like market timing (which I often speak against) - you are correct. There is an element of market timing here. While I don't trade to try to take advantage of market fluctuations, when putting new money into the market I sometimes hesitate if I feel that the market may be over-valued. If I was planning to invest a large amount in this segment, I would probably content myself with moving into the market incrementally through a series of trades. In this case, since I only intend to commit a small portion of our portfolio, there is no sense in making multiple purchases. I will wait a few months to make sure I am comfortable with my next step. Since I am a buy and hold, minimize your expenses and diversify like crazy kind of investor, my most important priority is to achieve a high degree of comfort with all my investment decisions. After all, I am in it for the long haul.

Any ideas, comments or suggestions are welcome.