Fund name: Metzler Payden International Real Estate (MPREX)

Objective: The Fund seeks long-term capital appreciation. Normally the fund will invest at least 80% of its assets in non-U.S. real estate equity securities. It may invest up to 20% of its assets in U.S. REITs, other U.S. real estate equity securities, and fixed income securities issued by real estate companies. A real estate company generally derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate, or has at least 50% of its assets in real estate. In any interesting twist, the fund may also invest up to 25% of its assets in emerging market real estate securities. The fund is non-diversified.

The fund concentrates on "supply constrained areas with solid economic activity, growing demand and increasing consumer spending trends. Further, we look for low vacancy rates as well as rising rents. This high quality portfolio is extremely well-diversified across countries, sectors, assets and tenant types."

Adviser: Metzler/Payden is a joint venture between an American and a German investment firm. It currently has approximately $1.7 billion of assets under management. The American firm is Payden & Rygel, which has $50 billion under management. The German firm is MP&R Ventures, an affiliate of a large Frankfurt financial institution which manages €37 billion in investments for institutional clients and mutual funds, including European equity and balanced funds. Metzler is celebrating its 333rd birthday this year (I’m happy for them, though jealous that I wasn’t invited to the party).

Managers: Christopher Orndorff and James Neal. Orndorff is a Chartered Financial Analyst, Managing Principal and Head of Equity Strategy at Payden & Rygel and has been with the firm for 17 years. Neal is President and CEO of Metzler's North American real estate subsidiary and is responsible for overseeing the real estate portfolio design and implementation process for Metzler's institutional and private clients. He has been with Metzler for 18 years. Both managers have substantial experience in real estate.

Inception: February 22, 2007.

Minimum investment: $5,000 for regular accounts, $2,000 for IRAs or for accounts with automatic investing plans which commit at least $250/month.

Expense ratio: 1.25% after expense reimbursements. The prospectus offers a nice feature: "The Adviser has guaranteed that, for so long as it is the investment adviser to the Fund, Total Annual Fund Operating Expenses (excluding interest and taxes) will not exceed 1.25%." There is a 2% redemption fee for shares held under 30 days.

Comments: Investing in international real estate makes sense. Quite a lot of sense, so far as I can tell. The question is whether you want Payden Metzler to manage your slice of the international real estate pie.

International real estate is attractive both as a diversifier and on grounds of total returns. On grounds of diversification, international real estate has essentially no correlation with anything. Real estate markets are local. Rents and leases are subject to purely local forces; rents in New York are nearly triple the rents in Philadelphia, despite the fact that they’re only a hundred miles apart. And real estate investors tend to be local since they’ve got to grapple with the intricacies of local zoning and building regulations. As a result, US real estate companies have little exposure overseas just as foreign real estate developers have little here. A recent study by JP Morgan Asset Management says that the top US real estate companies derive 0.5% of their revenues from non-U.S. properties and the top 10 foreign real estate companies derive only 3% of their revenues from the US; in contrast, the top 10 foreign non-real-estate companies (e.g., Toyota and Nestle) derive 33% of their revenues here. This pattern holds broadly true: there’s little correlation between England and Sweden, between Ireland and Australia or between Japan and the Netherlands. There is, in short, no "global" real estate market whose values will rise and fall together. Finally, real estate markets show little correlation either with their own or with other nations’ stock markets.

On grounds of total returns, international real estate has been on a tear. In the aggregate, global real estate markets have offered double-digit returns in the trailing 5-, 10-, 15- and 20-year periods. Metzler and other real estate investors argue that demand for real estate will continue to fuel strong returns in the foreseeable future. They offer at least two reasons. First, with the evolution of the European Union and the marked growth in Asian economies, demand for real estate, particularly in the areas of office and industrial, has outpaced supply. Japanese real estate companies have seen sharp share price rises on reports of a 59% decline in office supply over the next five years. This year alone Tokyo office supply is expected to decline 23%. Demand is also growing faster than supply in Singapore, where office market vacancy rates are low and office rent rose 30% in the past year. The second factor is the spread of REIT laws. In the US and other countries which passed REIT laws, there was a substantial (albeit one-time) shift upward in real estate values. Twenty nations have passed REIT laws, many of them recently, and others are moving in that direction. Both of these factors suggest that real estate, and international real estate in particular, are serious components of a broadly diversified portfolio.

The second question is whether to entrust your money to Metzler Payden in particular. While there are something like 70 international or global real estate funds, almost all carry sales loads or are open only to institutional investors. There are about three retail, no-load funds:

Metzler Payden becomes the fourth. Arguments in Metzler’s favor include the fact that they can hold both US and developing market securities, which alleviates the need for separate domestic and international funds. Metzler has a successful real estate investing operation already. Under Mr. Neal’s leadership Metzler has acquired, developed, leased and sold real estate assets totaling more than US$8 billion. And fans of active management will appreciate Metzler’s targeting of "high-growth areas with stable political and legal climates."

Bottom line: Metzler likely represents a good choice for investors seeking diversification away from both equity markets and the US real estate market. Their investing team is well-seasoned, the firms in the partnership are rock solid and their expenses are reasonable. I don’t have any evidence to suggest that they’re automatically superior to their three competitors, but they do have substantial and unique strengths.