While Western real estate has been something of a rollercoaster ride for investors this year, some fund managers have looked beyond the borders of the U.S. in their search to add some diversity in the form of real estate to their portfolios. Interestingly, some have set aside a large chunk of their portfolios for this one sector.

Traditionally two funds are best compared within a sector, such as materials or energy. However, actively managed mutual funds have the capability to resemble anything the fund manager sees fit within the fund's stated objectives. In the case of Third Avenue Value ( TAVFX), the holdings have come to resemble those of the iShares MSCI Hong Kong Index Fund ( EWH).

Third Avenue Value is a mutual fund managed by Martin J. Whitman. The fund invests in common stocks of well-financed companies at a discount to what the advisers believe is their true value. Currently, a large portion of the fund's assets are placed in Hong Kong real estate companies. In particular, one of these holdings is the Hong Kong real estate company Cheung Kong Holdings, which makes up 12% of the fund's total assets.

Chueng Kong Holdings gives both funds great opportunity for investors looking to grab a chunk of the Hong Kong real estate market. The company is the flagship and one of the nation's top conglomerates. It is headed by Li Ka-shing, who is currently labeled as the sixteenth wealthiest man in the world. The Wall Street Journal has even gone so far as to label him "Warren Buffett of Asia."

Chueng Kong Holdings is one of the largest developers of the nation's commercial, residential and industrial properties. The company's website claims that the company is responsible for the development of one in seven private residences in Hong Kong.

EWH, which follows the MSCI Hong Kong Index, seeks to correspond to the total Hong Kong market. This fund, like TAVFX, also holds a considerably large percentage of its holdings in Hong Kong real estate companies such as Chueng Kong Holdings. The company currently makes up more than 8% of the ETF's total holdings.

According to his second-quarter letter to shareholders, Martin Whitman's TAVFX holds a large percentage of the fund in this asset class because he feels well poised to take advantage of the opportunities presented by the global credit crunch. With such a large allocation to Hong Kong, Whitman must believe that the country will be a rising star in the near future. The similarities between the two create an unusual chance to compare two funds of varying composition and structure as well as an active and passive strategies.

Aside from Cheung Kong Holdings, TAVFX has positions in quite a few other companies that one will find in EWH's top 25 holdings. In total, TAVFX invests 33% of its assets in stocks that overlap with EWH.

Beyond the similarity in holdings, however, it becomes evident that the two are very different entities. While EWH is based on a strict index that mirrors Hong Kong's total market, actively managed TAVFX fund, seeks to invest in companies that the fund manager feels meets its criteria.

In the case of TAVFX, this leaves few barriers on where the fund can invest. While it's very likely the index that EWH follows will stay the same in the foreseeable future, there is little holding back TAVFX from making significant changes in its holdings. However, this active management also leads to an increase in fees placed on shareholders. EWH charges 0.52% while TAVFX charges 1.11%.

Another ETF offering exposure to Hong Kong real estate is Claymore/AlphaShares China Real Estate ETF ( TAO), 50% of which is invested in the same stocks as EWH and TAVFX. The more concentrated bet on real estate comes with a 0.65% expense ratio, midway between the other two.

All three funds have been in the black this year. However, TAVFX, EWH and TAO still vary in their returns. According to Morningstar, TAVFX currently has year-to-date returns of 14.3% while EWH comes in at 30.3% and TAO has a 54.0% gain. Notably, increasing exposure to Whitman's favored asset class has led to higher returns this year.

Martin Whitman's decision to hold such a large portion of his fund in Hong Kong's real estate industry has helped the fund pick up a good portion of the positive growth that EWH has experienced. What it comes down to is the type of investor you consider yourself.

Conservative investors may benefit from the increased diversification that comes with the actively managed TAVFX. However, if you are a more aggressive investor who wants even more exposure to the sector that Whitman seems to favor, EWH or TAO may be the best choice for you.

TAVFX's top 10 holdings include: Cheung Kong Holdings, Henderson Land Development, Toyota Industries, Posco ADR ( PKX), Mbia Ins 144A FRN, Wheelock & Co., Brookfield Asset Management ( BAM), Covanta ( CVA)(CVA), Bank of New York Mellon ( BK) and Nabors Industries ( NBR).

EWH's top 10 Holdings include: Sun Hung Kai Properties, Cheung Kong Holdings, Hong Kong Exchange, Hutchison Whampoa, CLP Holdings ( CLPHF), Hang Seng Bank, Hong Kong & China Gas, Swire Pacific, Hong Kong Electric Holdings and Hang Lung Properties.
At the time of publication, Dion had no positions in the stocks mentioned.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

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