Milwaukee Journal Sentinel Investment Trends column [Milwaukee Journal Sentinel]

March 31--Whether close to home, or in places like California and Texas, two Waukesha money managers say they're seeing signs of a real estate revival that could last for many years.

Existing home sales in February were 10.2% higher than in the same month a year earlier, according to the National Association of Realtors. It was the 20th consecutive monthly increase.

Meanwhile, residential housing prices rose for the 12th consecutive month, the group said.

Real estate agents and home builders are telling managers at Sterling Capital Management Inc. that their local housing markets are improving and that demand and prices are increasing, said Tim Portz, a portfolio manager at the firm.

Most believe the real estate low was either in fourth quarter 2011 or first quarter 2012, said Tom Portz, Tim's father and president and portfolio manager at the firm. So while it may not be the very beginning of the upturn, there is likely a lot more room for the revival to go, he said.

"We see a renaissance in the U.S. economy and a lot of prosperous years ahead of us," <person>Tom Portz said.

That makes for opportunities in real estate, he said.

One way investors can seize them is to invest in a real estate mutual fund if it is offered in their 401(k) or other retirement plans, Tim Portz said.

"You don't want to put all your money there, but it would be a good fit for 5% to 10% of a portfolio," he said.

iShares Dow Jones U.S. Real Estate Fund (IYR, $69.48) is an exchange-traded fund organized by BlackRock that tracks the Dow Jones Real Estate Index.

This ETF offers a quality way to invest in real estate because it provides instant diversification, Tom Portz said. It has a distribution of 3.52%, and healthy trading volume.

The biggest risk with this ETF is the possibility of an economic slowdown that would adversely affect employment and housing, he said.

The iShares Dow Jones U.S. Real Estate Fund is trading in a 52-week range of $58.88 to $69.55. It is expected to perform on a pace with the Standard & Poor's 500 index, but with different risk characteristics, Tom Portz said.

MGIC Investment Corp. (MTG, $4.95), Milwaukee, is a mortgage insurance provider that might appeal to more speculative investors, Tom Portz said.

The company is more than 50 years old, has more than 15% share of the market, and may well be a survivor, he said. MGIC is booking about $2 billion worth of new business each month and reducing its older, more troubled book of business.

But it is not without risks.

MGIC shares traded below $1 last year after a difficult earnings report. Roiled by the real estate meltdown, the company has not had a profitable year since 2006. MGIC has continuing disputes, including a significant one with Bank of America's Countrywide unit that prompted it to create a $100 million reserve.

Economic troubles could send MGIC shares back into the cellar, and there is always a threat that legislators will change the landscape the company competes in, Tom Portz said. There is increased competition in the industry, but that is also a sign of improvement, he said.

Still, MGIC recently settled a dispute with mortgage finance company Freddie Mac and raised more than $1.15 billion in March in an offering that helped the company lower its risk to capital ratios and bring them in line with industry standards.

Barclay's upgraded MGIC shares and raised its price target to $8, while Standard & Poor's increased its credit rating to B-, still below investment grade, but up from CCC+.

"This is a stock that has potential but also risk for significant losses under the wrong scenario. So it should be a portfolio position, perhaps one-half percent to 1%," Tom Portz said.

MGIC is trading in a 52-week range of 66 cents to $6.19 and could reach $8 in the next 12 months, he said.

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The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.

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