Q:  What is the history of the company and the fund? A : Managers Investment Group is the U.S. distribution arm of Affiliated Managers Group. We have offices in Connecticut, Pennsylvania, and Illinois. We offer long-term investment strategies through our unique platform that includes a family of funds and separate accounts managed by a selection of Affiliated Managers Group’s (AMG) Affiliated investment boutiques and a series of open-architecture mutual funds. As a subsidiary of AMG, MIG is uniquely positioned to provide access to well-known institutional firms and exclusive boutiques. The Managers Real Estate Fund is one of our open architecture mutual funds. At the end of March, the Fund had approximately $200 million in asset under management, while MIG, overall, had approximately $30 billion under management across our entire mutual fund platform. This fund was started in 1998 with two objectives: One, to obtain a high level of current income and, two, to generate capital appreciation through the investment in real estate securities. Urdang was hired to subadvise the fund in 2004 and we were attracted to the quality of their investment team, their sole focus on real estate, and their disciplined investment process. Since 1987, Urdang has been managing private equity real estate for institutional and high-net-worth investors, investing in office buildings, apartments, shopping centers, and retail centers. In 1995, Urdang expanded to managing U.S. Real Estate Investment Trusts (REITs) as well, further expanding to a global real estate securities platform in 2006. Q:  How does investing in REITs differ from investing in stocks and bonds? A : While REITs are publicly listed and trade on national exchanges like many other stocks, the underlying exposure to the real estate market is what distinguishes them from traditional stock and bond asset classes. Commercial real estate has historically provided capital preservation and protection from inflation, as well as provided a significant source of yield for investors. This is especially attractive today, given the historically low government bond yields in the market and the resulting thirst for yield globally. REITs provide access to these benefits without the asset- and location-specific risk and illiquidity traditionally associated with private equity real estate investments. Finally, the universe of investors in the REIT market distinguishes it from the stock and bond markets. There are primarily three main investors in this asset class — the sector-dedicated investors like us; the generalists, who are in this asset class as a by-product of being broad equity investors; and short-term traders. Because the investor base is made of investors with differing industry knowledge, expectations and goals, as an informed and patient investor, we believe there is significant opportunity for mispricing in the market. Q:  What is your investment philosophy? A : We employ a relative value investment philosophy with the goal to identify mispriced securities in the public market. What is interesting about the asset class is that REITs really are hybrid securities. REITs trade like equity, but their value is based in large part on the underlying real estate owned by the company. Mispricing opportunities can arise from inconsistencies in public vs. private market values and other non-market factors. Therefore, we look at a REIT’s stock price from both perspectives to determine whether current valuations are fair. This approach separates us from some of our peers. Q:  What is your investment strategy and process? A : Our philosophy governs our strategy. Our analysis of REITs as hybrid securities involves assessment of REITs as traditional stocks and as real estate investments to determine whether current valuations are fair. On the one hand, we focus on operations, growth, market cap, and leverage – factors that affect the price of a stock. On the other, we assess the underlying real estate assets and how they are priced in the private market relative to the public valuations. We have a three-pronged research process: top down, bottom up, and risk assessment. Our team meets formally on a weekly basis and informally on an ongoing basis to discuss top-down sector and geographical analysis as well as individual stock recommendations. All members of the investment team participate in the research process and discuss each potential investment in the context of the portfolio before decisions are implemented. Q:  What is your research process and how do you look for opportunities? A : Our top-down research process involves examining certain macroeconomic factors, such as growth, interest rates, inflation, employment, and consumer spending, as well as factors that might affect individual sectors (hotels, industrial, apartments, retail and office). Based on these results, we form an opinion on the regions and sectors we prefer to over- and underweight in the portfolio. Our bottom-up process is a five-point framework of analysis, where we assess a REIT’s management, assets, strategy, catalysts, and valuation. The first four of these are qualitative factors and represent about 50% of our bottom-up efforts. The fifth factor, valuation, makes up the other 50% of our bottom-up analysis. When it comes to management, one of the main things we are looking at is whether the management team has a track record of being good stewards of capital. Do they know their markets, their tenants, and the economics of their leases? That separates the managers that add value over time. Then, we assess the quality and location of their assets, as well as whether they are in primary or secondary markets. Regarding strategy, we pay a lot of attention not only to the strategy as it is articulated by management, but whether the firm has the resources to execute that strategy. We also assess whether a strategy makes sense in the current economic environment, and if it will hold up in a changing environment. The last thing we look at from a qualitative standpoint is catalysts. These are simply the potential events that can be expected to drive a stock up or down, including large tenant move-outs or expected dividend cuts. The quantitative portion of the process is valuation. We are relatively unique in how we value REIT stocks. Our proprietary models look at leverage, growth, size, property type and other critical factors to derive our view of relative value. We underwrite each company’s balance sheet to understand the full impact of debt and debt maturities on a company’s ability implement its strategy. The model is applied to all stocks and sectors within our investment universe and allows us to compare valuations on a like-for-like basis over time. Assessment of relative value is dynamic and ongoing. We run our proprietary models continuously to capture rapidly changing market, sector and company factors, and we use this information to establish dynamic sector weightings and buy-sell ranges for our portfolio. Q:  What is your portfolio construction process? A : We traditionally hold 40 to 55 stocks in the portfolio. Portfolio construction is performed with the end goal of outperformance on a risk-adjusted basis. Our top-down and bottom-up research processes yield a subset of stocks for the portfolio, and our final weights are determined by our level of conviction for each investment, and then adjusted based on our risk parameters versus the benchmark. Our annual portfolio turnover is approximately 65% over time, although it varies with the level of volatility in the market. When there is a lot of volatility, like in 2011 for example, it creates more opportunities for mispriced assets and as a result, our turnover will tend to increase. Q:  How do you define and manage risk? A : A risk management element is built into our portfolio management process. Urdang has developed a unique, proprietary risk model that allows us to understand the exposures within the portfolio and the sensitivities of the portfolio to changing market conditions. We are not looking to avoid all risk. The goal is to understand the market conditions and to make informed over- and under-weight stock decisions based on that understanding. For example, as a result of our top-down and bottom-up processes, our stock picks might exhibit an unintended overweight to properties in California, and our models will help us to identify and correct that. Or, it could be that we are invested in too many companies with higher than average leverage, or that we don’t have enough companies with leverage in an environment that is rewarding that strategy. On an ex-post basis, the investment team uses a weekly risk report that includes a summary of REIT valuations, VaR, tracking error, liquidity, correlations and other important position characteristics to understand and manage risk at the portfolio level. Q:  How have events over the last 25 years influenced how you invest in real estate? A : The global financial crisis taught all investors the risk of using too much leverage. Within the REIT market, if you think of the 2006-2007 timeframe when the markets were extremely optimistic and capital was free flowing, we were in a situation where poorly managed REITs with 90% leverage were being purchased by private equity players at outrageous valuations. That was a time when our strategy actually underperformed – we weren’t looking to buy the next takeover target because it was not consistent with our process, and because we saw little foundation to purchase a stock on that basis. We have the same process in place that we established in 1995, and it has served us well, allowing us to outperform on a gross basis in 15 of the 17 calendar years we have been in the market.