When financial markets are on the upswing, it’s often said that a “rising tide lifts all boats”. That’s not exactly true. 

Yes, many stocks go up during a broad market rally. But keep in mind that for an investor to buy a share of a stock another investor must be willing to sell that share of stock. The money has to go SOMEWHERE.

That being said, certain groups of stocks just won’t participate in a rally for one reason or another. While the S&P 500 Index is enjoying a 6%-plus gain year-to-date, the S&P 500 Real Estate Sector Index doesn’t have much to celebrate.

The index has given up around 3.4% so far this year, and has pulled back over 5% from its peak in November. What’s the reason?

#-ad_banner-#One obvious concern is the much-hyped brick-and-mortar retail Armageddon. Last year, large retailers were shellacked as they lost market share to the likes of Amazon (Nasdaq: AMZN) and other virtual shopping entities. 

Whether traditional retail’s death spiral is intensifying is up for debate. But, in typical crowd-driven market form, real estate stocks that focus on renting space to the retail industry experienced the fallout.

And while that is a genuine concern for investors holding retail-centric real estate investment trusts (REITs), real estate isn’t just retail. A healthy overall economy will
boost the office, industrial, and multi-family real estate space.

Facing a market where valuations are feeling a little stretched ahead of their fundamentals, cautious investors wanting to put new money to work may need to seek some value with decent income. Here are three real estate-specific closed end funds (CEFs) I’ve found that fit the bill.

CBRE Clarion Global Real Estate Income Fund (NYSE: IGR)
A long time StreetAuthority staple, mainly in the Daily Paycheck portfolio, IGR is considered a core real estate fund. As the “global” in its name implies, the fund takes a broad approach, with just 41% of the fund’s holdings allocated to U.S. REITs.  Property-type diversification is also broad with just a 24% allocation to the worrisome retail sector. Shares trade at a nearly 12% discount to their net asset value (NAV) at around $7.80 with a yield approaching 7.7%.

Neuberger Berman Real Estate Securities Income Fund (NYSE: NRO)
While focusing on primarily the United States, NRO also has limited retail exposure, with just 9.4% allocated to regional malls and 6.7% allocated to shopping centers for a total of just 16.1% retail exposure. For investors seeking low volatility, a 5-year chart of NRO’s share price is shockingly similar to the EKG of a cabbage, remaining in a tight band between $5 and $6 a share. The current share price is on the lower end at around $5.15, a 12% discount to NAV, and yields 10.5%.

Alpine Global Premier Properties Fund (NYSE: AWP)
Like IGR, AWP takes a global approach. With a similar U.S. allocation, the fund has also made an interesting 14.5% bet on Japan. There’s also extremely low retail exposure at just 10.41%. Its heaviest weighting is a nearly 30% residential stake, which could work out in the face of growing global economies. Shares trade at $6.70, a 10.4% discount to NAV, and yield 9.0%

Risks To Consider: One of the most common risk to closed end funds is the amount of leverage used by the fund manager to juice up returns and distributions. AWP uses no leverage, IGR only 14%, and NRO is the heaviest user at 30%. 

The risk to leveraged funds, of course, is rising interest rates. Higher borrowing costs put a pinch on returns and distributions. While rates are more likely to rise, it should be an unusually gradual process. This should give a smart manager time enough to adapt.

Another factor would be the length of the current bull market. Ignored sectors of the market tend to stay that way when everyone is in rally-party mode. Investors playing the value game must be patient. The tradeoff is much higher than average income streams.

Action To Take: As a basket, these three funds throw off a nearly 9% yield and trade at an average discount to NAV of 11.5%. Long term investors looking for real value on a price basis and attractive income would do well to take advantage of this current inefficiency in the real estate sector.

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