Real estate securities significantly trailed the broader market during the quarter, due primarily to rising interest rates and concerns that the Federal Reserve would begin to tighten monetary policy. Indeed, at the end of the year, the central bank did announce that it would begin to taper its monthly asset purchases in January 2014, but it also said it would keep short-term rates in place until the labor market improves further in an environment of restrained inflation. Industry performance was mixed, with diversified real estate investment trusts and regional malls exhibiting some strength and health care and self-storage facilities weaker.
The Real Estate Fund returned 0.72% in the quarter compared with −0.75% for the Wilshire Real Estate Index and −0.88% for the Lipper Real Estate Funds Index. For the 12 months ended December 31, 2013, the fund returned 3.28% versus 2.15% for the Wilshire Real Estate Index and −1.53% for the Lipper Real Estate Funds Index. The fund's average annual total returns were 3.28%, 17.27%, and 8.93% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.78% as of its fiscal year ended December 31, 2012.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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The Real Estate Fund charges a 1%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The largest detractor from performance was the shopping center sector in general, and our stock selection in the space was also a negative. An overweight in regional malls and our holdings in the group, however, boosted fund results. Stock selection in lodging, which does well in improving economic conditions, was also beneficial. At the end of the year, regional malls were our largest weighting. We had a significant weighting in the apartments segment, where strong demand and increased occupancy have boosted rent increases. We have a substantial allocation to office REITs, and we own several community shopping center REITs, which are frequently anchored by neighborhood grocery stores or other needs-based amenities.
The U.S. economy seems to be on a path toward continuing moderate growth. Improving economic activity drives the demand for our holdings. Investors have been concerned that rising interest rates would put downward pressure on real estate stocks, but better fundamentals should lead to higher rents and growth in cash flows and distributions. The recent weakness in our segment of the market has resulted in better valuations for many of our portfolio holdings. U.S. REITs now appear more attractive compared with equities in general, and also with bonds. We are optimistic about the long-term prospects for real estate stocks, backed by growing demand, constrained supply, and reasonable access to capital markets.