New Real Estate Funds Crash and Burn

12/31/07 - 06:18 AM EST

BDX SPG VNO

Lawrence Carrel

But it's fair to say the fund industry didn't learn its lesson.

The list of fund families rolling out new REIT offerings last year includes household names such as Schwab, a unit of Charles Schwab (SCHW - Cramer's Take - Stockpickr), Neuberger Berman, a unit of Lehman Brothers (LEH - Cramer's Take - Stockpickr) and Phoenix Funds, a unit of Phoenix Companies(PNX - Cramer's Take - Stockpickr).

Janus Capitol (GEF - Cramer's Take - Stockpickr) JNS, a firm known for investing in fast-growing companies that saw several funds implode along with tech bubble, also launched a REIT fund this year.

All the more shocking is that many of the REIT funds debuted this year after it was clear the housing market was in a decline.

Home sales began slowing as far back as 2005. By January 2006, housing prices peaked. With mortgage defaults and foreclosures surging this year, home prices have been falling ever since.

Considering the tech bubble's massive loss of wealth happened just seven years ago, you'd think mutual fund companies -- and investors -- wouldn't be so quick to forget.

After all, 36 tech funds closed in 2001 alone, followed by another 32 the next year, according to Morningstar.

So why, after all that, would the industry introduce a slew of products to capture a falling market? One bound to end in tears for both the funds and their investors?

"Investors have a psychological bias to think returns will persist, and the superficial story is that real estate will continue to perform well and the market will keep going up," says Charles Trzcinka, finance professor at Indiana University's Kelly School of Business.

"The funds are taking full advantage of this demand to bring in high fees."

As of Nov. 30, the three worst-performing newcomers were the (EURAX - Cramer's Take - Stockpickr)Cohen & Steers European Realty A Fund (EURAX), down 26.2%, the (SAREX - Cramer's Take - Stockpickr)S.A. Real Estate Securities (SAREX), which sank 18.2%, and (EIIGX - Cramer's Take - Stockpickr) E.I.I Global Property Institutional (EIIGX), 10.8% underwater since its launch.