Is Cohen & Steers Realty Too Big?
Asset size makes it difficult for this Bronze-rated fund to buy REITs at the lower end of the market-cap spectrum.
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Cohen & Steers Realty Shares is the flagship strategy of the first investment company focused on listed real estate. As a proven option, it receives a Morningstar Analyst Rating of Bronze.
The fund is challenged by its size. Including its clone Cohen & Steers Instl Realty Shares (CSRIX), the strategy currently has $7.3 billion in assets and is one of the biggest actively managed offerings in the domestic real estate Morningstar Category. That makes it difficult to buy REITs at the lower end of the market-cap spectrum. Sibling Cohen & Steers Real Estate Securities (CSEIX), a more opportunistic version of the same approach with a $3.7 billion asset base, offers a comparison. While the difference in market-cap tilts between the two strategies is sometimes minimal, it can be pronounced. In September 2014, Cohen & Steers Realty Shares had a 24.8% combined stake in small- and micro-cap real estate stocks, versus 35.4% for Cohen & Steers Real Estate Securities.
This fund's less aggressive profile hasn't been an advantage against its smaller sibling since 2011, but it has subsequently fared better than most peers. The fund had a top-third calendar-year finish in 2014's rally, when real estate stocks received a boost from an unexpected drop in interest rates. It also placed in the category's top decile in 2015, amidst considerable turbulence. Although the fund struggled in 2016, as office REITs like top-10 holding SL Green Realty Corp (SLG), weighed on results, it still has a competitive record under lead manager Thomas Bohjalian. From his mid-2012 start date through May 2017, the fund's top-quintile 10.4% annualized gain falls only 5 basis points shy of the FTSE NAREIT Equity REITs Index.
There's reason to believe Bohjalian can overtake the index over a full market cycle. He's done that as the lead manager of Cohen & Steers Real Estate Securities since early 2008. He and his predecessors here use a top-down and bottom-up approach that has outperformed since the strategy's 1991 inception. And fees are reasonable for active management, which should keep the fund in the hunt.
Process Pillar: Positive | Alec Lucas, Ph.D. 06/07/2017
Lead manager Thomas Bohjalian and his team methodically integrate top-down and bottom-up elements in their approach, earning the fund a Positive Process rating. They meet weekly with firm economist Michael Penn to discuss business news and economic data in order to formulate and refine their macroeconomic views. Taking into account real estate market fundamentals, capital market conditions, and regulatory environments, these views aid judgments about individual securities.
Security selection starts with the analysts, whose coverage responsibilities are divided by property sector. They engage in fundamental research, evaluating each firm's management, balance sheet, and properties. All of this helps them calculate net asset value and cash flow growth estimates using cap rates and internal rates of return. A proprietary valuation model then quantifies each stock's price relative to NAV and future dividends, while also recommending security weightings. Informed by macroeconomic assumptions, such as employment expectations, the managers buy stocks with attractive prices compared with underlying assets, projected growth, and other real estate securities. They sell when stocks become expensive from those same vantage points or fundamentals deteriorate.
Turnover tends to be above most peers'. Under Bohjalian, it has been about 50%-80%, versus 45%-50% for the category median.
Management aims to build a portfolio of roughly 40-60 stocks, primarily U.S. REITs and some shares of real estate-operating companies. They keep the portfolio diversified by property type and geography. Over- and underweighting guidelines versus the FTSE NAREIT Equity REITs Index depend on property type but not geography. Exposure to malls, apartments, offices, shopping centers, and healthcare facilities may be 50%-150% of the index's weighting, while stakes in industrials, self-storage, timber, and data center subsectors can vary from 0% to 200%. Individual position sizes are limited to about 10% of the fund's assets, though Simon Property Group (SPG) can be an exception.
The current portfolio shows management's positive view on housing. Belief that job growth will release pent-up demand for all forms of housing has led to investment in residential REITs, such as top-five holding UDR (UDR), which focuses on middle-tier apartment complexes. As of March 2017, the fund had a 23% stake in residential REITs, versus 16% for the index. However, the fund's 10.7% retail stake is about half the benchmark's. Management thinks retail's weaker fundamentals are still not priced in to current values.
The fund's benchmark excludes infrastructure and timber REITs, but management will sometimes invest in them. In 2016, for example, the fund built a top-30 position in cell tower operator American Tower (AMT).
Performance Pillar: Positive | Alec Lucas, Ph.D. 06/07/2017
The fund merits a Positive Performance Pillar rating for its good long-term, risk-adjusted record. During the trailing 10 years through May 2017, the fund's 5% annualized gain edged the FTSE NAREIT Equity REITs Index and placed in the domestic real estate category's top quintile. During that stretch, the fund was no more volatile, as measured by standard deviation, than its benchmark and typical rival.
Although there have been several changes to the fund's team in the past decade, current managers Jon Cheigh and Tom Bohjalian deserve most of the credit for the fund's 10-year record through May 2017. Cheigh capably led the fund from early 2008 through May 2012, at which point Bohjalian took over. Under Bohjalian, the fund has outperformed in varied market conditions. The fund had top-quintile calendar-year showings in 2013 and 2015, amidst considerable turbulence. The fund also had a top-third finish in 2014's rally, when real estate stocks received a boost from an unexpected drop in interest rates.
The strategy is not foolproof, however, as was evident in a bout of underperformance from 2011 to 2012. In 2012, management misjudged the deceleration in apartment fundamentals, which restrained this fund and stocks like top-five holding Equity Residential (EQR). Its 2.5% calendar-year return acted as a drag on results, playing a big part in the fund's 15.7% bottom-quartile showing.
People Pillar: Positive | Alec Lucas, Ph.D. 06/07/2017
The fund's Positive People rating reflects its veteran leadership and effective team-based approach. Lead manager Thomas Bohjalian, who joined this fund in mid-2012, became a comanager of Cohen & Steers Real Estate Securities in March 2006. Since becoming lead manager in late February 2008, he has guided that fund--which is more opportunistic than this one but uses the same basic approach--to a strong record. Bohjalian consults with comanagers Jon Cheigh and Jason Yablon, though both guide their own offerings. Cheigh joined the fund in 2007 and was its lead from early 2008 through May 2012, at which point he took over Cohen & Steers International Realty (IRFAX) in the wake of that fund's poor performance. Jason Yablon joined in 2013 and has led closed-end funds Cohen & Steers Quality Income Realty (RQI) and Cohen & Steers REIT & Preferred Income (RNP) since mid-2012.
Seven analysts support the managers. That's the same number as mid-2014, but there has been turnover at three positions since then. Analysts have a wide range of industry experience, from three years to nearly 20. The analysts divide coverage by property sector type.
Per the most recent Statement of Additional Information, Bohjalian has at least $10,000 invested in the strategy, while Yablon and Cheigh each invest nothing. Those figures should tick upward in 2017, however, as 5% of management's compensation will be based on fund ownership.
Parent Pillar: Neutral | 02/02/2016
Founded in 1986, Cohen & Steers was the first investment company focused on listed real estate. As this part of the market grew, so did the firm. Publicly traded since 2004, Cohen & Steers now oversees $52.6 billion in assets, spread across 22 open- and closed-end funds as well as other investment vehicles, which are global in scope. While fund performance has been mixed, the firm's history and size within the real estate space give it advantages over smaller, less senior peers. That was clear in the credit crisis, as Cohen & Steers took the lead in many REIT secondary offerings during 2009, raising capital to help provide liquidity and reverse the trend of catastrophic loss. The firm has also passed on economies of scale in the form of below-average fees across its fund lineup.
Though still focused on real estate, Cohen & Steers has recently made a push into commodities and natural-resource equities, launching five such funds since 2012. The firm's co-founders have also gradually moved away from daily involvement: Neither co-founder is a named manager on any fund currently. These changes herald the dawn of a new era but also entail uncertainty about how the firm will fare. Meanwhile, manager ownership remains low, thanks in part to a compensation plan that awards restricted stock in the firm versus shares in the funds.
Price Pillar: Positive | Alec Lucas, Ph.D. 06/07/2017
Reasonable fees versus other actively managed offerings earn the fund a Positive Price Pillar rating. The fund's 0.96% expense ratio is 13 basis points below the specialty no-load peer median and lower than 63% of those peers. Plus, investors benefited from reasonable trading costs in fiscal 2016, as brokerage fees of 0.08% of average net assets were in line with the category median. Still, when this fund's asset base is combined with that of clone Cohen & Steers Institutional Realty Shares (CSRIX), the resultant $7.3 billion in assets could result in further economies of scale. The fund's fees are also no match for the 0.12% levy of passive rival Vanguard REIT ETF (VNQ).
Alec Lucas does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.