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Online Extra: "Volatility Has Worked for Us"


The Alpine U.S. Real Estate Fund trounced its peers last year, gaining more than 80%. But that's not surprising, given the expertise of manager Sam A. Lieber, who has been at the helm of the A-rated portfolio for more than a decade. Lieber, who's also manager of the A-rated International Real Estate fund as well as Alpine's CEO, likes homebuilders, but he's avoiding real estate investment trusts.

BusinessWeek reporter Kate Hazelwood recently spoke to Lieber about minimizing risk and finding the best values in the real estate market at home and abroad. Edited excerpts of their conversation follow:

Q: What's the current state of play with your International Real Estate fund (EGLRX)?

A: We haven't made heavy sector or regional bets internationally, so we're finding international real estate to be not much more volatile than our other funds. You know, typically international funds are supposed to be at greater risk -- currency and political -- but now some people are looking to international markets to offset U.S. volatility.

We've chosen to run our international fund with a reasonable spread. There are countries that we have overweighted. We were 21% in Asia and Japan, we're now 45%. There are limits, though, to the kind of volatility you'll allow. We could restructure to actually enhance returns at the expense of volatility. We could rotate the country or sector allocation on a more aggressive basis. But our international fund is not a concentrated fund -- we have over 80 names in the portfolio and in the last two years have had less than 50% turnover.

Q: With eight major elections in Asia alone this year, any thoughts on political risk?

A: Nothing is going to matter [internationally] as much as our election coming up, because this particular cycle we're seeing the U.S. lead the recovery out of the recession.

However, the recovery is -- and it isn't -- a globally coordinated effort. It isn't in that there are some countries that can accelerate their economy at a much greater rate than ours. The U.S. may have turned the corner in May and June and had a fabulous third quarter, but countries like Thailand were already in recovery mode and have grown almost 7% in 2003, with growth predicted to be 8% for 2004. They're much more nimble and recovering at a much quicker pace the U.S. just can't meet.

Q: How about an example?

A: Some economists are expecting 8% growth in 2004 for Hong Kong. Great, that's an appealing figure. But you can also get caught in a market with that kind of volatility. Let's say SARS does come back to Hong Kong, and you're stuck. It's that kind of thing we try to be mindful of.

Q: Is your U.S. Real Estate Fund similarly structured?

A: Not at all, because it's geared toward capital-appreciation opportunities instead of income as a primary focus -- and toward companies that will outperform their sector at the beginning of this particular economic cycle.

Now in doing that, we add more volatility because these companies perform differently based on economic activity -- and the anticipation of that activity. To the degree that the market is busy reading tea leaves, that has more impact on the kinds of companies we're currently invested in than with relatively dull companies where you don't see economic activity leading to future growth.

Q: You've been critical of traditional evaluations of risk. Why?

A: We look at the U.S. fund from a two- to three-year investor perspective. Over the two to three years, we're not going to worry about the ups and downs that much. Some stock we've owned for weeks, others a decade. I think where Morningstar and others have it wrong is that they look at volatility as something static, when the issue really is what's your volatility over time.

Since our term [with U.S. Real Estate Fund] is longer, if we get volatility within the periods, we're less concerned. Over the long term volatility has worked for us. The fundamental issue is: Risk, defined by market volatility, is something we're willing to live with for short periods.

Q: How did your real estate funds perform in 2003?

A: The U.S. fund was up 82% in 2003, 33% over the three-year period, 18.8% over the five-year period.

International was up 55% in 2003, 17.8% for the three years, and 10% percent for the five years. Again, we're not going for a home run -- we're looking for singles and doubles.

Q: What's appealing to you right now in the U.S.?

A: We're most heavily exposed to two sectors -- lodging/hotels and homebuilding. Vis à vis lodging, because of 9/11, SARS, and the Gulf War, a perfect storm hit lodging. We don't expect to get back to 2000's levels right away. We think getting back to where the stocks were in 1998 is doable.

The other is homebuilding -- it's trading at 8 times now, and we think it should be trading at 12 to 14 times earnings, which is what it traded at in the 1980s and early 1990s (see BW Online, 1/15/04, "Why Housing Should Stand Tall"). Take an example: Lennar (LEN), an $8 billion market-cap company and a dominant player in consolidating the sector. They're growing their market share by buying public companies like US Home and buying private companies, too.

They're also growing their own business internally, using their resources to buy more land, redevelop it, and pick up market share just because they can afford to pay for land or wait until land is permitted. So it's absorbing or putting out of business small developers by exploiting its operational efficiencies. It's similar to the Wal-Martization of retail.

Q: What's not appealing?

A: REITs. Almost all are trading at a premium of close to 20% of the asset value. At this time we don't think there's that much growth in commercial real estate in the next two years. It's a very dull place to be for the next two years and should get better after that -- but you're not going to get 10% growth. You might get a couple percentage points of growth.

However, there's a company we like called Chelsea Property (CPG). They build, manage, and own discount shopping centers, including New Jersey's Woodbury Commons, and now are doing a similar thing in Japan and Mexico. We think they can grow both their earnings and their intrinsic value by 10% a year over the next three years and can grow into their premium valuation. So we think they deserve their premium.


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