Imitation is the sincerest form of flattery in life, and investing is no different. Studies show that imitating the top hedge fund managers, often called gurus, can lead to market-beating returns — and, even better, without the heavy fees that those funds charge.
Today we’re going to look at the two real estate investment trusts (REITs) held in the Global X Top Guru Holdings Index ETF (GURU -2.24%), which buys the top holdings of popular value hedge funds. We’ll discuss which funds hold American Tower (AMT 1.07%) and Prologis (PLD -2.83%), and what their thesis may be.
American Tower is an infrastructure REIT that owns cell towers around the world. It owns over 220,000 towers and other communication assets in 25 countries on six continents. The business converted to a REIT in 2012 and has had 17% annual returns since then.
American Tower management projects about 13% revenue growth in 2022, with close to half of that coming from international sources. The REIT’s domestic business doesn’t grow much, but it has been able to continue expansion overseas to keep growth moving.
The guru who invested in American Tower is Chuck Akre, who runs the Akre Focus Fund. The fund targets high-quality businesses that have the opportunity to reinvest free cash flow organically and are run by disciplined management with integrity.
The fund has owned American Tower since inception in 2009 — before American Tower transitioned to a REIT structure. The majority of the fund’s assets under management are invested in its top 10 “core positions,” and American Tower is currently a 10% position.
Here’s what the fund management team said about American Tower in a 2019 investment presentation:
We believe that cell towers are the bottleneck business within wireless data and communications, spanning countries, wireless carriers, handset manufacturers, and connected devices. The physics of radio frequency, signal propagation, and spectrum reuse and handoff promise an ongoing reliance on macro towers for network deployment. In addition, the increasing demands being placed on these networks from 4G and skyrocketing wireless broadband data consumption herald the need for more towers, more tenants/equipment per tower, and more high-incremental margin revenue growth for American Tower.
Quite a lot has changed in the business since 2019, including the launch of 5G, and the REIT’s $10 billion acquisition of data-center business CoreSite Realty, which some think could be a problem. But Akre’s core thesis is intact. Remember, one of Akre’s core tenets is only investing when one trusts that management will allocate capital well.
Prologis is the 800-pound gorilla industrial REIT in the logistics industry. It manages more than $210 billion in assets, owns 4,675 buildings (mostly warehouses) around the world, and has an occupancy rate exceeding 98%.
Prologis has several big-name hedge fund owners, including Adage Capital Management, Citadel, and AGR. The fund we’ll focus on is the Third Avenue Real Estate Value Fund (FUND: TVRVX), which is actually a mutual fund but it invests using hedge fund-like principles.
The fund was founded by value investing legend Martin Whitman and is now run by Jason Wolf and Ryan Dobratz. It invests in undervalued REITs that have the potential for long-term capital appreciation. The fund’s average annual turnover is under 20% — that means it holds investments for five years on average. As of March 31, Prologis was its largest position (out of 30) with an allocation of 6.9%.
According to a recent shareholder letter, the Prologis investment is part of a basket of stocks, totaling 41% of the portfolio, that are “capitalizing on secular trends within property, including structural changes that are driving more demand for industrial properties, self-storage facilities, and last-mile fulfillment.”
The fund managers are also impressed by Prologis’ pristine balance sheet and management competence, writing in March, 2021:
[T]he company has further solidified one of the most compelling capital structures in the real estate industry with a prudent loan-to-value ratio of approximately 25% that is primarily comprised of fixed-rate debt at an average cost of 1.8% for a term that exceeds 10 years. As a result, the long-tenured management at Prologis (including one of the true leaders in the real estate space, CEO Hamid Moghadam) have set up the company for what could be a very rewarding period ahead as incremental rental income and asset management fees seem likely to accrue disproportionately to shareholders on the “bottom-line” with its interest costs locked-in.
A year later, the REIT reported that its weighted average interest rate was down to 1.5%, and 91% of its close to $18.5 billion in debt has a fixed rate. As the Federal Reserve and other central banks around the world continue to raise interest rates in an effort to fight inflation, and that inflation drives up rents and management fees, Prologis will be making the same loan payments while profits flow straight to shareholders.
To clone or not to clone
While you can beat the market by simply copying elite investors, that doesn’t mean you can’t also use them as a jumping-off point. Study the great investors, their positions, and the theses for them, and pounce when you think the thesis is legitimate and aligns with your own investment goals.