Nov. 16 (Bloomberg) -- The JPMorgan U.S. Real Estate Fund is beating the Standard & Poor's 500 Index for a seventh straight year because mergers and acquisitions in the property industry have reached a record.

The takeovers of real estate investment trusts, including Chicago-based Trizec Properties Inc. and Shurgard Storage Centers Inc. in Seattle, propelled the JPMorgan fund to a 30 percent gain in 2006, topping the S&P 500's 13.5 percent advance. The fund avoids homebuilders, whose shares fell 27 percent this year as the inventory of unsold houses climbed to an all-time high.

``Wall Street has been reluctant to recognize'' the value of REITs, said Kevin Bedell, 50, a money manager at Chicago-based Security Capital Research & Management Inc., who oversees the $917 million mutual fund for JPMorgan Chase & Co. ``We got in the way of a lot of those undervalued securities.''

REIT mergers and acquisitions doubled this year to $98 billion, according to data compiled by Bloomberg. The JPMorgan fund rose at an annual rate of 28 percent during the past three years, ranking ninth of 52 competing property funds tracked by Bloomberg. The best performer was the $282 million Strategic Partners Real Estate Securities Fund, managed by Newark, New Jersey-based Prudential Investment Management, which advanced at a yearly clip of 30 percent in the same period.

Sharpe Ratio

JPMorgan's fund holds 26 stocks that the managers perceive as cheap relative to the companies' earnings potential. More than half of the fund's assets are in office and multi-family housing properties, malls represent 12 percent and hotels account for 11 percent of the fund's holdings.

``We favor companies that grow the top line,'' said Bedell, who runs the fund with Anthony Manno, 54, Kenneth Statz, 48, and David Rosenbaum, 37.

``They are not a slave to macroeconomic forces and are more interested in the earnings of companies they invest in,'' John Coumarianos, an analyst at Chicago-based research firm Morningstar Inc. ``That helps them buy stocks cheaper and reduce volatility.''

Morningstar gives the fund three out of a possible five stars. The JPMorgan fund has a Sharpe ratio of 1.48, compared with the 1.24 average for real-estate funds. A higher ratio means better risk-adjusted returns.

Security Capital was formed in 1995 to manage real-estate investments for institutions and foundations. The firm, which oversees $6 billion in assets, was acquired by New York-based JPMorgan in 2004 as part of its purchase of Bank One Corp.

Trizec Takeover

Bedell and his colleagues bought a stake in Trizec in September 2005 when the shares traded at $22.95. Brookfield Properties Corp. and U.S. buyout firm Blackstone Group LP agreed to pay $29.01 a share for the company in June, bringing the JPMorgan fund's gain to 26 percent in nine months.

JPMorgan was the second-biggest shareholder of Fairmont Hotels and Resorts Inc. Shares of the Toronto-based company soared 62 percent from March 2002 until Saudi Prince Alwaleed bin Talal and investment firm Colony Capital LLC bought the company for $3.24 billion in April.

Shurgard provided some of the best returns for the fund. Public Storage Inc. paid $65.16 a share for Shurgard in August. The JPMorgan fund bought the shares for $32.50 in July 2003.

Bedell is now focusing on REITs of offices and apartments because rents are rising in metropolitan regions such as New York and San Francisco.

The fund's largest holding is apartment landlord AvalonBay Communities Inc., whose shares advanced 40 percent this year. REITs are exempt from federal and sometimes state taxes in exchange for paying out at least 90 percent of their taxable income as dividends.

Rental Rates

The No. 2 holding is mall owner Simon Property Group Inc., whose stock climbed 25 percent this year. The third-largest position is Equity Office Properties Trust, whose shares gained 44 percent since the beginning of the year.

The average office rental rate in U.S. downtowns rose 8.9 percent to $28.21 a square foot in the third quarter from a year earlier, according to New York-based Cushman & Wakefield.

Apartment vacancies are falling as costs to own a home have shot up with the increase in interest rates. Vacancies in the 25 biggest U.S. markets dropped to 5.2 percent in the second quarter from 6.2 percent a year earlier, according to data compiled by Deutsche Bank Securities Inc. in New York.

``Rents are poised for rapid growth,'' Bedell said. ``The strength and durability of the growth will surprise people.''

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

Last Updated: November 16, 2006 00:05 EST