Global real estate stocks declined modestly in the third quarter, but underlying returns were mixed. U.S. real estate stocks finished higher and outperformed the broader U.S. equities market. While uncertainty surrounding the timing of a Federal Reserve interest rate hike influenced real estate securities during the quarter, property fundamentals continued to improve; and real estate supply and demand look relatively balanced over the long term. Outside the U.S., developed Europe posted modest gains on optimism over the region's slow economic recovery. Emerging markets were punished by concerns about the impact of slowing global economic growth and, in particular, China's sharper-than-expected slowdown.
The Global Real Estate Fund returned −1.77% in the quarter compared with −1.42% for the FTSE EPRA/ NAREIT Developed Real Estate Index and −2.28% for the Lipper Global Real Estate Index. For the 12 months ended September 30, 2015, the fund returned 4.05% versus 3.58% for the FTSE EPRA/ NAREIT Developed Real Estate Index and 2.22% for the Lipper Global Real Estate Index. The fund's average annual total returns were 4.05%, 7.96%, and 13.88% for the 1-, 5-, and Since Inception (10/27/2008) periods, respectively, as of September 30, 2015. The fund's expense ratio was 1.07% as of its fiscal year ended December 31, 2014.
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The Global Real Estate Fund charges a 2%
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 U.S. represents the largest absolute weight in the portfolio. We hold a diverse range of commercial real estate companies with a focus on regional malls, apartment real estate investment trusts (REITs), and industrial REITs. The U.S. leasing pipelines remain active, and occupancy rates and rents are increasing in many markets across a range of property types. Commercial real estate should benefit from constrained new supply in conjunction with a measured return to more robust economic activity. The portfolio's next-largest exposure is Japan, where we believe our holdings are well positioned to benefit from the economic recovery and a reversal of deflationary pressures. We also maintain a significant weighting to the United Kingdom.
Developers have been slower to launch construction of new commercial real estate projects relative to previous economic recoveries, allowing occupancy gains and rental growth to support cash flows, net asset values, and dividends. Though supply is gradually increasing, we expect the favorable supply/demand imbalance to continue over the next few years and, therefore, believe that good operating fundamentals should persist for the foreseeable future. In the short run, we are encouraged by the fact that interest rates are likely to remain relatively low given moderate global growth and inflation. Regardless, fundamentals will drive real estate values over the long term, and we will focus on seeking the best opportunities throughout global locations.