Figuring on 8 Percent

Last week I asked an industry veteran who works for a company that manages a major core real estate fund about the fund's returns. He answered not surprisingly that the past year has been pretty brutal--the fund lost almost 40% for its investors, a fairly typical result in the competitive set. But he also mentioned that over its nearly 40-year history, the portfolio has recorded about an 8% annualized return just about what advisors promised when they started marketing core funds all those decades ago.

Lost in the past 20 years of rollercoaster performance and overleveraging, commercial real estate is supposed to give investors a bond plus return--somewhere between lower risk bonds and higher risk stocks. An 8% annualized return delivers rather nicely on that promise.

But core fund marketers also proffered that real estate was less volatile than other assets--providing relatively reliable steady, eddy returns. The pitch was well-leased properties would yield strong income and provide opportunity for additional modest appreciation.

The low volatility part of the story hasn't exactly panned out--stocks certainly seesaw more wildly, but real estate hardly provides anything approaching stable, reliable year-to-year returns. If investors mistime their plays, they court big losses--pity anyone who bought into a core strategy post 2005.

But whether you are a long-term player or short-term market timer, core has to look good right now. The big open-end funds approach market bottom--value losses finally flatten out with further downside risk limited. You can start collecting a decent income coupon even if values don't ratchet up for a while and eventually take advantage of appreciation mark-ups in any recovery.