U.S. stocks were mixed in the second quarter, with large-cap benchmarks turning in relatively flat performances. U.S. real estate securities moved sharply lower during the period and underperformed the S&P 500 Index in an environment of rising long-term interest rates. While property fundamentals did not materially change overall in the real estate sector, investors seemed to react to the prospects of Federal Reserve tightening expected later this year. Rising long-term yields contributed to a sell-off of securities thought to be more vulnerable to rising interest rates, such as utilities and real estate investment trusts.
The Real Estate Fund returned −9.89% in the quarter compared with −9.61% for the Wilshire US Real Estate Securities Index and −8.69% for the Lipper Real Estate Funds Index. For the 12 months ended June 30, 2015, the fund returned 5.32% versus 5.59% for the Wilshire US Real Estate Securities Index and 4.73% for the Lipper Real Estate Funds Index. The fund's average annual total returns were 5.32%, 14.53%, and 7.13% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.76% as of its fiscal year ended December 31, 2014.
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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.
All real estate subsectors were negative, although there was a wide dispersion of returns among property types. Health care was by far the largest detractor, as generally long lease structures increase that subsector's bond-like characteristics and susceptibility to rising rates. The industrial subsector was also challenged, in part due to concerns of rising construction supply. We feel that this new supply is supported by strong demand and is not yet worrisome. Other areas also experienced double-digit return declines, including shopping centers, office, and regional malls. While there were few places to hide, lodging and self-storage held up better than the other groups. Some niche segments also performed relatively well, including data centers and single-family home rentals.
Despite some investor angst over looming short-term interest rate hikes, rates still remain low by historical standards. Any Fed rate increases are likely to be data-driven at a measured pace, leaving monetary policy largely accommodative in the near term. While economic growth remains far from robust, employment continues to recover, and we have begun to see small improvements in wage growth and household formation. In addition, the low price of oil should be a boost for consumers and, consequently, for our consumer-driven economy. This demand should benefit a wide variety of property types. We continue to believe that focusing on individual companies within our sector is the best way to create attractive long-term results.