No. of Recommendations: 12
some time ago I tried to address the question of what metrics were important to compare when evaluating these type money management firms and where does CNS fall in this scheme of things. I'm new at this and need help. Perhaps I can get Reitnut interested in a discussion of this?

Missash, I cannot comment specifically on CNS, as I have never spent much time analyzing how my former rival REIT asset managers manage their portfolios. (I did, however, learn something about Ken Heebner's CGM REIT fund from a client of ours, who said Mr. Heebner was something of a madman, placing huge bets on specific sectors). But, I have always maintained that management "philosophy, tactics and style" was a very important but much overlooked and ignored consideration in selecting one's asset manager, whether it be segregated all-REIT accounts or REIT mutual funds, open- or closed-ended.

In fact, you have inspired me to devote the upcoming issue of The Essential REIT to a general discussion of this topic. I hope to get it done early in the week following Thanksgiving. Accordingly, I will set forth here in this post only a broad outline of the issues that investors should look for or raise with their REIT managers. Of course, mutual fund investors never get to ask specific questions, but some of the following issues might be easily studied by looking carefully at the published mutual fund reports, as filed with the SEC.

OK, here is my list of a dirty dozen categories, which will be filled in with (perhaps too much) detail in the coming issue of the newsletter. If you could ask these questions, watch your prospective REIT asset manager squirm!

1. Performance Goals, i.e., how does the fund manager define "success?" What are their criteria for earning their fees, and why shouldn't we simply buy an indexed mutual fund or ETF and save on your fees?

2. REIT Philosophy, i.e., what is most important in being successful as a REIT asset manager? How do you approach REIT investing -- as real estate or a real estate business, and how important is REIT management? Balance sheet? Corporate governance? Do you make "macro" calls, based upon your views of the US economy, or the prospects for certain real estate sectors? Why do you think you are any good at this?

3. The Nitty-Gritty of Stock Selection, i.e., which is most important, real estate prospects, NAVs, AFFOs, or value creation -- and how do you select specific stocks for the portfolio? How important is a dividend yield in your selection process? Why?

4. Managing Risk -- how do you define risk? Volatility -- or permanent loss of capital? And how do you control and reduce risk?

5. The Big Picture, i.e., do you have an absolute performance goal, or just relative to a benchmark? What do you do if you conclude that REIT stocks are, as a group, very expensive?

6. Home-runs or Singles, i.e., how do you weight real estate sectors within the portfolio? Are you wiling to put 50% of your assets into hotels? Do you feel you "must own" a REIT if it comprises 5% of the benchmark?

7. Managing Turnover, i.e., how important is turnover and avoiding capital gains taxes that will be imposed upon your investors? Do you even care?

8. Subjective Criteria, i.e., to what extent are all your decisions based upon your valuation models? When do you override them, and why?

9. Research -- what's the process, who does it, and how often do you talk with REIT management? How important are property tours -- or are they just a marketing device to attract clients?

10. Sell Discipline, i.e., when do you sell a stock, and why? And, though this overlaps question 7, does it make sense to sell a stock you think is 10% overvalued if many of your clients will lose more than 10% to capital gains taxes?

11. Liquidity: How important is this, and how many trading days will it take you to establish or dispose of a 2% position when you don't like what's going on or when you think a stock is overvalued? Be honest: Include ALL REIT accounts you manage, not just the size of one particular account or fund!

12. "Off-the-Wall" Investments, i.e., do you buy non-REIT stocks such as homebuilders? Real estate data providers or brokers? Foreign real estate? What is your view on mortgage REITs?

I think we could learn a lot by asking these questions; the difficulty, of course, is getting honest answers! But perhaps even asking ourselves these and other related questions as individual do-it-yourself investors can be helpful in our own investment process.


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