Steven Buller likes to compare the property sector to a three-legged stool comprised of fundamentals, valuations and technical indicators. From that optic, and 18 months into a slump that has hurt real estate stocks globally, he believes that market conditions are starting to stabilize.
"The fundamentals are okay, although slightly declining, but that is factored into today's valuations," says Buller, 41, manager of the $58-millionFidelity Global Real Estate Series A, and a vice-president at Boston-based Fidelity Investments. "Valuations, which peaked in late spring of 2007, were at a modest premium," he says. "Now, they're trading at a 12% to 15% discount to net asset value. On that basis, things are looking relatively attractive."
Buller says technical indicators, which reflect capital inflows and investor sentiment, have begun to settle down, too, as investors have stopped exiting the sector. Still, he is concerned that there is a higher degree of volatility in the returns of property stocks, relative to broader equity markets.
"They have become a hedge fund darling. There is also the introduction of exchange-traded funds, which didn't exist before. And as they became volatile, many people came and played them," he says.
Since real estate relies heavily on access to financing, it has been highly correlated to the financial services sector, which has also taken a hit in the present environment. "We've traded like financials, and we are capital intensive. But we have a much better picture in terms of income and cash flow statements, and the balance sheet itself," Buller adds. "One could argue we could see better returns when the financials improve and/or people decide that we are not like financials."
Working with a team of 20 professionals in Boston, London, Tokyo and Sydney, Buller screens a universe of more than 400 listed companies around the world. A bottom-up stock picker, he tends to own 50 to 70 companies. Holdings are limited to about 4% of fund assets, although he can go as high as 10%. His portfolio turnover was fairly high in 2007, at 95%, but that was attributable to fund flows and hefty redemptions.
"We spend a lot of time visiting with companies, looking at the assets they own, and speaking to top management, even at the property level," says Buller. Country bets are limited to plus or minus 5%, relative to the benchmark FTSE EPRA/NAREIT Global Real Estate Index. Currently, the fund has an underweight position in the United Kingdom and an overweight in the United States.
One of the largest holdings is Babis Vovos International Construction SA. The Greek firm has an office-building portfolio in Athens and benefits from inflation-protected leases.
The company is also developing the largest mall in Athens, "which is under-retailed," says Buller, noting that the mall will open in early 2009. Babis Vovos stock is trading at 20 euros, or about 50% of net asset value. "Our London analyst has it valued at over 30 euros," says Buller.
A 1990 BA graduate from the University of Wisconsin at Madison, Buller was initially interested in two very different disciplines: finance and German literature. "At one period of my life, I wanted to save the world. In another period, I wanted to make money."
The capitalist in him won out, and he joined Fidelity in 1992 after completing a master's degree in finance at the same university. Buller began as a researcher in the high-income group and focused on distressed companies and bankruptcies. "I spent a lot of time analyzing real estate companies, too."
When Fidelity quit that line of business, Buller moved to the firm's branch office in London, England, where he spent two years setting up a credit process for the fixed income group. In 1997, Buller returned to Boston and was groomed to take over as manager of the $5-billion Fidelity Real Estate Investment Portfolio, the largest such fund in the U.S.
In 2004, Fidelity began launching global and international real estate stock funds. The firm launched the Canadian fund in May 2006. For the year ended July 31, the fund lost 21.1%, compared to an 18% loss by the median fund in the Real Estate Equity category. Part of the Fidelity fund's weaker performance is attributable to currency movements.
Currently, Buller is using a so-called barbell approach to structure his portfolio. "We have some very aggressive positions, such as residential developers in China. These are offset by some very low-leveraged companies that are defensive in nature." An example of the latter is Public Storage Inc. ( PSA/NYSE), the largest self-storage firm in the U.S.
Buller, who survived a similarly difficult environment in 1998, cleaves to the same message for investors: real estate is a long-term asset. "You have the ability to participate in REIT structures in many different countries. But you also have to put up with this volatility."
