Real estate investment trusts (REITs) moved higher in July and August, but a sizable decline in September wiped out those gains and left REITs with a negative return for the quarter. The selling was triggered by rising long-term bond yields in September. Industrial REITs lagged other segments during the period, as construction starts and new supply outpaced demand, leading to concerns in some quarters about weakening fundamentals going forward. The office segment was also noticeably weak. The regional malls subsector was strongest overall, while the self-storage and apartment segments also turned in relatively favorable results.
The Real Estate Fund returned −3.05% in the quarter compared with −3.05% for the Wilshire US Real Estate Securities Index and −3.63% for the Lipper Real Estate Funds Index. For the 12 months ended September 30, 2014, the fund returned 14.40% versus 13.48% for the Wilshire US Real Estate Securities Index and 9.40% for the Lipper Real Estate Funds Index. The fund's average annual total returns were 14.40%, 15.81%, and 8.63% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.79% as of its fiscal year ended December 31, 2013.
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if it did, the performance would be lower.
The mixed office and industrial subsector was the primary drag on relative results due to our underweight in data center REITs. The housing sector has been turning in mixed numbers in the last few months, as prices and sales of existing homes have improved, while construction and sales of new homes continues to lag. We were overweight in industrial REITs, which was the worst-performing subsector during the quarter. Stock selection in lodging REITs was positive, as our holdings performed well thanks to strength in revenue per available room and an improving business travel environment, which helped boost corporate profits in the segment.
The U.S. economy continues to grow, creating an attractive environment for real estate investments. Improving economic activity drives the demand for real estate, and new construction supply remains largely constrained. While fears have grown that a rise in interest rates might place downward pressure on net asset values, the benefits that real estate firms derive from an improving economy override these concerns, in our view. A strengthening economy should lead to higher rents, better cash flows, and healthy dividend distributions. We, therefore, maintain a favorable long-term view of real estate fundamentals.