Kenneth Heebner, manager of the top-ranked U.S. real-estate mutual fund, has sold stakes in New York property owners because prices will fall as banks, hedge funds and buyout firms fire workers.
The $1.7 billion CGM Realty Fund divested SL Green Realty, Manhattan's biggest office landlord, since the end of June, Heebner said.
The manager, whose fund has annually returned 40 percent a year since September 2002, cut stakes in real-estate investment trusts (REITS) to 25 percent of assets from 75 percent in December.
"You're seeing a retrenchment in the private-equity, hedge-fund and brokerage businesses, and there could be a lot of layoffs," Heebner said. "That could have a devastating impact on high-end residential real estate in New York. Appetite for office space will also decline."
CGM Realty had 4.5 percent of its assets in SL Green as of June 30. The New York-based company's stock fell 5.7 percent in the first six months of the year and dropped an additional 11 percent through Sept. 24. The 130-member Bloomberg Real Estate Investment Trust Index decreased 8.8 percent through Sept. 24.
Heebner, known for his rapid moves in and out of stocks, has steered the CGM Realty Fund to a 25 percent return this year, through Sept. 24, to rank as the No. 1 property fund tracked by Bloomberg.
He said he shifted more than half of the fund into global mining companies earlier this year.
At the $3.5 billion CGM Focus Fund, Heebner sold his 15 percent stake in investment banks including Merrill Lynch and Morgan Stanley during the second quarter. He said they will be hardest hit by the subprime rout.
The Focus Fund has climbed 59 percent this year, through Sept. 24, to place as the No. 1 U.S. stock fund.
U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales, according to Real Capital Analytics.
Heebner had two-thirds of the real-estate fund in homebuilder stocks at the beginning of 2005, but sold his entire stake by the end of 2005.
Great article. Just bought a position in CGMFX and was considering taking a position in CGMRX. Seems Heebner is on the ball. However in looking into both funds it seems the energy play is similiar(no complaint in making money}but it seems both funds owe its success to energy. Would I be foolish to invest in both ??
No. While there is a strong overlap between the holdings of both CGMFX and CGMRX, I think CGMRX will return to RE holdings once this bloodbath ends. At that point, the returns on RE should surpass traditional Large Cap companies.