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Stay Home on Asian Real Estate Fund

I am a big believer in searching for new products and new markets. Even if you decide to avoid the vehicle for now after kicking the tires, the study alone can be worthwhile.

This is the case with the RMR Asia Pacific Real Estate Fund (RAP). It's a new fund, listed in May, and as the name implies, it invests in real estate companies.

It is nothing like the REITs that U.S.-based investors are used to. With domestic REITs and REIT funds, yield is the primary objective; the RMR fund's goal is capital appreciation. In fact, I found no mention of targeting dividends in the prospectus. Therefore, the ride could be bumpier with this fund than with a U.S. REIT fund.

It owns foreign stocks traded locally; its biggest holdings are in Japan (38%), Hong Kong (27%) and Australia (18%). It has smaller holdings in Singapore and Thailand, and it is permitted to invest in New Zealand, India and South Korea.

With such a diverse collection of economies, naturally there are big differences in the respective real estate markets.

Despite low interest rates, Japanese land prices plummeted for 13 years in a row before flattening out this year. Meanwhile, Australia's real estate market has been hot for the last few years, possibly contributing to what could be a burgeoning inflation problem.

The zigging and zagging of the various markets can be a positive for diversification, but in buying the fund you are betting that the managers will be right about where to be heavy and where to lighten up.

Most investors buy U.S. REITs for their yield and because REITs have a low correlation to stocks. For now it may be too soon to know what, if anything, the RMR fund correlates to.

So Far, Little Correlation
The RMR fund (RAP) has underperformed the iShares U.S. Real Estate Index Fund

According to, the iShares U.S. Real Estate Index Fund (IYR) has a slight 0.159 correlation to the RMR fund, but a big chunk of the RMR fund's relative decline can be attributed to an erosion of the premium embedded in the price of the fund at its IPO.

If the two become more correlated in the future, which appears to be happening toward the right hand side of the chart, it may be right to question the utility of the RMR fund.

Your first reaction to that statement might be that we have a real estate bubble in the U.S., so investing in real estate abroad does in fact constitute a hedge. However, the fears about a bubble in the U.S. are more about residential real estate -- U.S. REITs invest in shopping malls, office buildings and apartment complexes.

Net Asset Value
Source: Yahoo!

Shorter term, there appears to be less correlation in net asset value between the RMR fund and the iShares U.S. Real Estate Index Fund than over the longer term. For now, it is not clear that the RMR fund really offers as much diversification as one might think. Perhaps we need some sort of crisis somewhere to know for sure.
At the time of publication, Nusbaum held none of the funds mentioned, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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