Investment Spotlight: Global Real Estate

Portfolio weight: varies from 5-10% of most client portfolios.

This year, we expanded the public real estate implementation to reflect the increasing maturation of the global public real estate markets. The pace of adoption of the public real estate investment trust (REIT) structure in capital markets around the world has accelerated in recent years, providing an opportunity to participate in global real estate activity in a liquid and cost-effective manner. In particular, investment opportunities in the global real estate market spawned a distinct global fund, DWS RREEF Global Real Estate Securities Fund (RRGIX), which we find very attractive. Also, the increasing importance of energy infrastructure has prompted our preferred infrastructure manager, Kayne Anderson, to offer a closed end fund which invests in energy related master limited partnerships (MLP's), Kayne Anderson MLP Investment Company (KYN) .

Annualized Total Return as of 8/31/2007

Global Real Estate

Around the world, RREEF has 17 corporate offices, more than 1,400 employees and investments in approximately 30 countries. RREEF combines top-down regional allocation with an active bottom-up approach to selecting real estate securities. Regional asset allocation is set globally by a regional allocation committee based on its expectation of returns from each region over one- and three-year periods, while stock selection is made locally by regional teams using a consistent bottom-up, research-driven process. Its professionals provide real-time information on market rents, vacancy rates and property values. We think the information advantage obtained from their direct investment real estate business helps the managers to anticipate the trends within the various sectors of the real estate market and to evaluate how these trends will likely affect the REIT universe.

As of June 30, 2007, RRGIX had $669 million in net assets in countries around the world. In making strategic allocations and investing bottom-up locally, RREEF divides the global real estate market into four regions: North America, Europe, Asia and Australia. The portfolio managers make stock selections for the fund out of a potential “investing universe” of over 800 real estate issues, and typically hold approximately 150 REITs or REIT equivalents in the portfolio at any given time. The approximate current regional allocation for RRGIX is as indicated in the graph below:

Selected Investments

Since RRGIX employs an active strategy, it tends to concentrate its investments on a small number of names in which it has strong conviction, thus the top ten companies comprise 26% of the portfolio.

The Top Ten Holdings of RRGIX as of June 30, 2007 were:

Regarding the two largest of these,

Mitsubishi Estate is a comprehensive Japanese real estate developer established in 1937. The Firm builds and owns residential properties, office buildings, shopping centers, hotels, golf courses, and fitness clubs. Mitsubishi Estate developed and still owns much of the prestigious Marunouchi business district of Tokyo. It partnered with Nippon Life Insurance to redevelop OAZO, a high-rise office and retail complex at Marunouchi. Other businesses include architectural design, real estate brokerage, and civil engineering. The company is also majority owner of New York City’s Rockefeller Center through its Rockefeller Group subsidiary. Its net income for fiscal year ending March 31, 2007 was $829 million, on total revenues of $8.3 billion.

Simon Property Group is an S&P 500 company and the largest public U.S. real estate company. Simon is a fully integrated real estate company which operates from five retail real estate platforms: regional malls, Premium Outlet Centers®, The Mills®, community/lifestyle centers and international properties. It currently owns or has an interest in 380 properties comprising 258 million square feet of gross leasable area in North America, Europe and Asia. The company is headquartered in Indianapolis, Indiana and employs more than 5,000 people worldwide. Its net income for 2006 was $564 million on revenues of $3.3 billion.

Energy Infrastructure as a “Real Estate” exposure

To gain exposure to the energy infrastructure space, we use Kayne Anderson MLP Investment Company (KYN), which invests principally in Master Limited Partnerships (MLP’s). Founded in 1984 by Richard Kayne and John Anderson, Kayne Anderson Capital Advisors is a leading investor in its specialty with approximately $5.2 billion of private equity and alternative investments, including $2.6 billion in MLP’s (see side-bar). Kayne Anderson manages alternative assets with a focus on achieving absolute returns on a risk-adjusted basis through a disciplined investment process. Its investment strategies seek to identify and exploit investment niches that we believe are less well understood and not broadly followed by the general investor community. Infrastructure, generally, is one of those, and energy infrastructure particularly so.

MLP’s have been held predominantly by a relatively small number of taxable U.S. retail investors. Due to this limited focus, the market for MLP’s can experience inefficiencies which we believe Kayne Anderson can exploit.

KYN invests principally in MLP's and other midstream energy companies, whose principal businesses are to operate assets used in the gathering, transporting, processing, storing, refining, distributing, mining, or marketing of natural gas, natural gas liquids, crude oil, refined petroleum products or coal. Thus, we view these opportunities as a form of fixed (often underground: pipeline, storage tanks), or movable (tankers) real estate. Importantly, this opportunity is not fundamentally about the price of the product itself (the commodity play) but about the rents charged for storing and transporting it.

The fund will target 50% of its total assets in private investments and the rest in publicly traded securities of MLP's and other midstream energy companies.

We believe that this strategy offers an opportunity for attractive risk-adjusted returns based on several characteristics of MLP's, including steady distributions, solid growth potential and good tax efficiency. MLP's provide an average annual cash flow of 6.0% to 7.0%. Additionally, distributions have historically increased at an average annual rate of over 6.0%. These dividends are also treated as qualified dividend income eligible for the 15% tax rate.

As of May 31, 2007, KYN had $1.5 billion invested in a variety of MLP investments. The approximate allocation by category for KYN is as indicated in the graph below:

Selected Investments

Regarding two of these,

Energy Transfer Partners, L.P. is a publicly traded partnership owning and operating a diversified portfolio of midstream energy assets. ETP’s natural gas operations include natural gas gathering and transportation pipelines, interstate transmission pipelines, natural gas treating and processing assets located in Texas and Louisiana, and three natural gas storage facilities located in Texas. These assets include approximately 12,200 miles of intrastate pipeline in service, with an additional 500 miles of intrastate pipeline under construction, and 2,400 miles of interstate pipeline. ETP is also one of the three largest retail marketers of propane in the U. S., serving more than one million customers across the country. Energy Transfer Partners reported EBITDA for the third fiscal quarter ended May 31, 2007 of $244.7 million as compared to EBITDA of $145.6 million for the third fiscal quarter of 2006, an increase of $99.1 million.

Inergy, L.P. is a rapidly growing propane marketing and distribution company that serves over 700,000 customers in the Midwest, South, Southeast and Northeast United States. Inergy L.P. sells and leases propane, propane supplies and equipment to retail consumers (residential, commercial, industrial and agricultural) under a number of regional brand names. In addition to its retail business, the company also operates a natural gas storage business and provides wholesale propane supply, price risk management and distribution services to customers throughout the United States and Canada. Inergy reported adjusted earnings of $13.4 million for the quarter ended June 30, 2007, more than double the $6.5 million reported in the third fiscal quarter of last year.