For 20 years, Steve Buller has managed one of the largest and most Influential real estate funds.
1/30/2019 | By Clay Risher
REIT magazine: January/February 2019
REITs and real estate are often considered long-term investments. When it comes to REIT investors, few individuals have had as influential and consistent a career as Steve Buller. Buller is a portfolio manager in the equity division at Fidelity Investments, who has managed the Fidelity Real Estate Investment Portfolio for two decades.
Buller, who also manages the Fidelity Advisor Global Real Estate Fund and the Fidelity Flex Real Estate Fund, began his investment career at Fidelity in 1992. He was one of the earliest REIT fund managers and played an important role in providing the public investment capital that fueled the growth of the REIT industry at the start of the Modern REIT Era. Buller has also played a key role in the growth of new REIT markets globally. His efforts earned him Nareit’s 2016 E. Lawrence Miller Industry Achievement Award.
You recently celebrated your 20th anniversary of managing Fidelity’s Real Estate Investment Portfolio Fund. What’s been the most gratifying part of that experience?
When I look at the 20-year annualized returns of our fund, which have been around 10 percent, the fund significantly outperformed the S&P 500 over that period. We’ve provided very decent returns for our shareholders.
And when you look at the majority of shareholders at Fidelity, these are retirement type savings, so this is an added boost for their retirement.
Conversely, what have you found to be the most challenging part of your job over the years?
If anything, the most challenging and frustrating part is that although REITs have generated very good long-term returns, I still think there’s not as much acceptance of REITs in people’s portfolios. So that’s probably been my greatest challenge, along with fighting this battle of perception and trying to have better inclusion of REITs.
What do you attribute this to and why?
Sometimes it’s lack of knowledge. However, over the last 20 years, things seem to be improving for the visibility of REITs. REITs usually experience upticks following major events. For instance, after the dot.com bubble, REITs did well. And after the global financial crisis, REITs also performed quite well.
So, there is more interest from that perspective now. REITs have cash flow and hence growing dividends, which makes them a more viable, steady asset class for investors.
Speaking of massive market events, you’ve experienced the dot.com bubble, 9/11, and the global financial crisis. How have these events shaped your investment and management style?
In every challenge, there’s an opportunity, right? I think tumultuous events that happen seemingly out of nowhere will be a constant. People say they’re one-off events, but they still seem to happen with frequency. Three of them just happened in a 20-year period.
The global financial crisis definitely influenced my investment strategy. At that time, we saw investments moving from offensive REITs to defensive REITs. For instance, if you were in hotels at that time, you were offensive, but if you were in health care, you were defensive. If you were active in the trading of buildings and more progressive business models, versus just owning rental streams, then that was a more defensive position at the time. If you had more debt coming due, you were offensive, but if you were very low levered, then you were defensive. By having an offensive strategy at that time, it benefitted our shareholders as valuation disparity by sector was very high at that point.
Ninety-eight percent of your funds’ holdings are in domestic REITs, with approximately one-third invested in the industrial/office space, and almost 20 percent in retail. What is trending in these sectors?
I’ve been much more overweight in industrial and logistics. It’s not only the obvious demand from e-commerce players, but distribution facilities are increasing demand to assist e-commerce providers in the “last mile.”
Also, it is not talked about as much, but just as important is the state of distribution in corporate America. There’s a shortage of truck drivers; traffic issues affecting deliveries in key areas; and labor shortages in some places that affect distribution facilities. Companies are willing to pay higher rents to help alleviate these other issues in their distribution channels. Hence, we are seeing quite a bit of demand, especially for modern, new logistics facilities, which many REITs provide.
Regarding the retail sector, the fund has been quite underweight since 2016. Right now, the United States has way too much retail space per capita. We have 24 square feet per capita. The next closest is Canada at 10 square feet per capita, so it’s going to be a decade-long process to right-size the amount of retail real estate in this country. Couple this with what’s happening with the penetration of e-commerce, and we are much more neutral on retail exposure now due to valuation.
Since your fund is mostly domestic equities, how does Japan’s recent sell-off of more than half of its U.S.-based REIT holdings since 2016 affect funds like yours? What are the implications if the Japanese sell-off continues?
Up until recently, the Nikkei has been performing well, deviating flows from offshore products to on-shore products. All of the U.S. REIT funds, including ours, are “over-distribution” structured funds—that is, they convert capital to income to provide high dividends at the fund level. Most of the funds have cut these dividends over the past 18 months, causing some outflows as well.
There is also the perception and reality of rising U.S. interest rates that are responsible for Japan’s sell-off. However, the outflows in these U.S. REIT-domiciled funds have decreased substantially throughout 2018. And although still negative, the sell-off is less impactful than in 2017 or at the beginning of 2018.
Do you see any corrections coming in real estate or in certain sectors, and if so, what should investors look out for?
Anytime there’s too much supply of any individual product versus demand there’s risk. You see it in apartment buildings in some areas of the country. The same can be said for senior housing supply in some markets.
I’m not worried about the real estate cycle now. The one caveat is if there’s demand contraction, and so far, that’s been consistent.
Speaking of international investments, what non-U.S. listed REIT market do you see offering the best investment opportunities in the short term as well as longer term?
I’d say Germany, especially in the office sector. There has been a lack of new supply in that market coupled with a robust economy. In particular, I would point out growth in IT and finance in cities such as Berlin and Frankfurt.
We’ve seen major disruptions in certain industries due to technology innovators like Uber in transportation, Amazon in retail, and companies like WeWork in office space leasing. What other potential disruptors do you see affecting certain real estate sectors?
This is a great question because real estate has historically been an antiquated industry that hasn’t been disrupted that much. But if you look at WeWork and other “prop-tech” types of companies, I think we’re seeing much more disruption. Concepts like co-working or short-term facility space has been around a long time. That’s not a new phenomenon, but WeWork has perfected it and done a better job of it.
Where the disruption is occurring is where these heretofore niche needs are increasingly turning into enterprise needs. Large corporations like Facebook and Amazon are using WeWork for swing space. So, instead of leasing a 100,000 square foot facility, where historically a company is only using 80,000 square feet of it over a 10-year lease, why not lease 80,000 square feet long-term and use a co-working space with flexibility for the remainder with all the infrastructure costs built-in?
With so much emphasis being put on AI, self-directed investing, and fee pressure, what does the future of portfolio and funds management look like from your perspective?
It’s incumbent upon me to prove that I’m worth my fees, for sure. Fortunately, over a long period now, our funds’ returns have proven, whether relative to our benchmark or relative to our peer group, that our fees are justified.
There is nothing passive in what I have to learn and know every day. By that I mean I need to know how an ownership base behaves or doesn’t behave or how they vote in proxy. Those types of things I’ve learned are necessary knowledge for an active manager.
And, hypothetically, the more any sector becomes passive, it should create more opportunities for active management because that’s where research—intense research, like what we do at Fidelity—will allow us a distinct advantage. We just constantly have to prove that we can do this on a continuous basis.
Have you had any mentors that have impacted your career choices or your investment approach?
When I first joined Fidelity, I did not start in real estate but was in the high-yield group. The Fidelity real estate fund was managed by Barry Greenfield. He was very well known in the REIT world, one of the original REIT godfathers if you will.
In 1997, Barry was retiring after 33 years at Fidelity. In planning for Barry’s departure, Fidelity asked me if I wanted to get involved with REITs. I was working in our London office doing fixed income investments at that time. So, I came back to Boston and trained with Barry and then I formally took over running the fund in 1998. I worked with Barry for about three years and learned a tremendous amount from him.