"If an investor is purely seeking income, we are not the right fund," says Kolitch. "Our principal objective is capital appreciation."
Kolitch argues that the outlook for real estate stocks remains bright. He is particularly keen on residential markets. Housing construction fell from 2.2 million units in 2006 to 478,000 in 2009. Recently the annual pace has rebounded to 760,000. Kolitch says that construction will continue climbing because 1.2 million households are formed annually.
"We are in the early stages of what will be a multiyear recovery of the residential housing market," he says. "Cycles typically last six or seven years."
Homebuilders were among the first stocks to jump when construction activity began reviving. In the past year, stocks of leading builders such as Lennar (LEN) and Toll Brothers (TOL) more than doubled.Kolitch owned some of the homebuilders, but recently sold them because he figured that they had become too rich. Instead he owns companies that provide equipment and supplies for homebuilding. A holding is Owens Corning (OC), a maker of insulation and roofing supplies. The stock has jumped about 30% in the past year, but Kolitch says that the shares will continue running as the housing recovery unfolds. Why have suppliers like Owens Corning lagged behind homebuilders? Kolitch says that homebuilders are a pure play on new construction, so they rally hardest when the cycle turns. Suppliers like Owens Corning get some of their sales from remodeling, which doesn't depend on new home construction. Another supplier he likes is Stanley Black & Decker (SWK), the maker of power tools. He figures that the shares trade for 10 time next year's earnings, a modest price for a dominant supplier. Kolitch has about 20% of the fund in companies that operate senior living projects, such as assisted living facilities and nursing homes. Holdings include Capital Senior Living (CSU) and Brookdale Senior Living (BKD). The senior companies will get a big boost from revived home sales, Kolitch says. In order to afford assisted living, he points out, many residents must first sell their homes. That has been hard to do in recent years. But now that residential markets are reviving, there will be stronger demand for senior facilities. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.