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%www.barrons.comTHE DOW JONES BUSINESS AND FINANCIAL WEEKLY AUGUST 13, 2012

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August 6 through August 10, 2012

McGowan is a local-marketexpert who finds neighborhoodsoff the beaten track.

TalkingWithMichael McGowanPortfolio Manager, Forward International Real Estate

Real Estate Rulesby J.R. Brandstrader

August 6 through August 10, 2012

McGowan is a local-marketexpert who finds neighborhoodsoff the beaten track.

TalkingWithMichael McGowanPortfolio Manager, Forward International Real Estate

Real Estate Rulesby J.R. Brandstrader

Michael McGowan grew up globe-trotting. The son of a Unit-ed Airlines pilot, McGowan, now 47, routinely accompanied his father on international flights. His first business was a form of international investing: As a teenager, he and a friend would buy stamps from places such as Christmas Island, Nauru, and Papau so he could sell them at a profit to dealers in Australia.

These days, as manager of the Forward International Real Estate Fund (ticker: KIRAX), McGowan carries a passport that’s even more heavily stamped, and his profits are even big-ger. As of Aug. 9, the $84 million fund is up 41% year-to-date,

more than twice its Morningstar global real-estate category, and beating 98% of its rivals. Over three years, the fund is up 16.5%, nearly twice the 8.6% gain of its benchmark index, the MSCI World (net return, in U.S. dollars).

This tiny fund is not for the faint of heart, though. It lost half of its value in 2008, driven by a 27.6% plummet in the fourth quarter. Its five-year record, a 1.8% loss, is on par with the benchmark’s 1.7% loss, but beats the category, which lost, on average, 3%.

Nor is this fund for the cost-conscious investor. It carries a 5.75% load and an expense ratio of 1.65%. Its turnover is more than 300%, which indicates above-average transaction costs. The names in the portfolio, however, don’t change with anything near that frequency. McGowan frequently buys and sells the same stock over and over to profit from any volatility. “The big headlines are not changing what the company is worth,” he says. “They are just changing the price of the stock.” McGowan bought and sold Mitsubishi Estate (8802.Japan), for instance, 13 times over the course of 2011. The stock declined 23% over the course of the year, but McGowan’s frequent trading enabled a 12% gain. While he frequently trades big, liquid companies, he

TotalReturns*1-Yr 3-Yr 5-Yr

KIRAX

MSCIWorldNRUSD

%OfTop10Holdings Ticker Portfolio**

CSIProperties

Soundwill Holdings

HangLungProperties

HollowayLodgingREIT

WingTaiHoldings

WingTaiProperties

AlstriaOfficeREIT

Astro JapanPropertyGroup

BrookfieldCanadaOfficeProperties

InnVestREIT

Total: 46.73

Forward InternationalReal Estate Fund

also looks for deeper value in smaller, less liquid companies that he’ll hold onto for longer periods.

McGowan may have spent his for-mative years flying, but there is noth-ing up-in-the-air about his research. It’s boots-on-the-ground, walking the neigh-borhoods without a guide, and inputting data into a spreadsheet to spot anoma-lies and similarities in prospective invest-ments. Kevin Lai, who works for Merrill Lynch in Hong Kong, has hit the streets with McGowan. “His database is far more detailed than other portfolio managers’,” Lai says. “It includes pictures and in-formation on square footage, rent rolls, and other specs.” McGowan attributes his attention to detail to his start in the

business during the savings-and-loan cri-sis. “It taught me just how fast the price of a building can change and how to dig through financial statements,” he says.

Like his stamp collection, where he favors overlooked gems from Brunei and Borneo, McGowan is a local-market ex-pert who finds properties and neighbor-hoods off the beaten track. He looks for locations with good transportation, an educated population, and barriers to new supply—such as rivers, mountains, and oceans.

His universe is small to begin with; of the 1,200 publicly traded international real-estate investment trusts or compa-nies, only 600 are liquid enough to be in-vestable. Most funds stick to the biggest, most liquid names, but McGowan tries to find overlooked smaller companies that are trading at a big discount to the value of their properties and offer a high yield, even if it means sacrificing a little liquid-ity. The fund’s top 10 holdings altogether represent just 0.05% of the benchmark. He concedes concentrating on smaller and mid-cap names can be risky, but he con-siders the volatility an ally, and spreads his bets across 70 to 90 names.

A recent fact-finding trip to Canada turned up Allied Properties REIT (AP/U.Canada). “It specializes in the conversion of older industrial properties in Toronto and Montreal into trendy ‘brick and beam’ offices, favored by technology, media, ad-vertising, and other small, creative firms,” McGowan says, adding that rising rents, acquisitions and new developments will enable the company to increase its 4.4% dividend and retain cash to reinvest in its growth.

A longtime favorite is Shaftesbury (SHB.U.K.), which specializes in London’s West End. “It owns a unique collection of distinctive retail, office, and residen-tial buildings in Chinatown, Carnaby, and Seven Dials,” he says, adding that man-agement has been able to add value and

continue to grow this “near-irreplaceable” portfolio of properties with high demand and very low vacancy rates.

McGowan’s fondness for Asia leads him even further off the beaten track. Instead of the obvious play, focusing on the new towers in the flourishing downtown area of a city, McGowan looks for new shops and other developments near new sub-way stations, like Hang Lung Properties (0101.Hong Kong), a developer of upscale malls and high-rise residential proper-ties in both Hong Kong and China. “It is very disciplined and is unusual in that it is ‘net cash,’ or more cash than debt,” McGowan says. “And it’s well known for having excellent corporate governance.” He expects earnings to double in the next year thanks to demographic demand for its properties.

Similarly, Mapletree Commercial Trust (MCT.Singapore) owns a small portfolio of high-quality properties in the grow-ing western suburbs of Singapore. Its flagship, VivoCity mall, is located at the gateway to the new Sentosa Island resort and gaming area, and has seen a steady increase in visitor traffic. “The large, air-conditioned shopping malls are especially popular in this hot and humid climate,” he says. And in keeping with his trans-portation theme, Mapletree’s office as-sets are adjacent to new subway stations. McGowan expects more than 10% earn-ings growth in the next year, and for now there’s a 5.6% yield.

On his next trip, he plans to stop in the Philippines, where he already owns SM Prime Holdings (SMPH.Philippines), the nation’s largest owner and developer of shopping malls, which thrive on remit-tances from overseas workers; by some estimates, McGowan says, 30% of the $21 billion the Philippines receives from over-seas workers gets spent in SM Prime’s malls. Strong sales growth leads to higher rents. n

Forward International Real Estate Fund Performance as of June 30, 2012 2Q12 YTD 1 Year 3 Year 5 Year

Since Inception*

Gross/Net Expenses†

Forward International Real Estate Fund— A (NAV)1 7.07% 34.19% 7.87% 18.10% -3.43% 0.94% 2.14%/1.80% Forward International Real Estate Fund— A (MOP)2 0.93% 26.51% 1.66% 15.79% -4.57% -0.03% FTSE EPRA/NAREIT Developed ex-U.S. Index 0.73% 15.53% -5.37% 11.53% -5.55% -0.17%

Returns for periods greater than one year are annualized. The 1.65% expense ratio listed in article reflects Morningstar data that has since changed. The expense ratio as of 6/30/2012 is 2.4% Gross/1.80% Net. 1Excludes sales charge 2Reflects effects of the Fund’s maximum sales charge of 5.75% * 4/28/06 † The Fund’s investment advisor is contractually obligated to waive a portion of its fees and reimburse other expenses until April 30, 2013, in amounts necessary to limit the Fund’s operating expenses (exclusive of brokerage costs, interest, taxes, dividends, acquired fund fees and expenses, and extraordinary expenses) for Class A shares to an annual rate of 1.80%.

The performance quoted represents past performance, does not guarantee future results and current performance may be lower or higher than the data quoted. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance data current to the most recent month end may be obtained at www.forwardinvesting.com. Investment performance reflects fee waivers in effect. In the absence of fee waivers, total return would be lower. Total return is based on NAV, assuming reinvestment of all distributions. Performance does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

The FTSE EPRA/NAREIT Developed ex-U.S. Index is designed to track the performance of listed real estate companies and REITs worldwide, excluding U.S. companies. One cannot invest directly in an index.

The MSCI World Index is a free float-adjusted market capitalization index designed to measure global developed market equity performance.

Top 10 Holdings as of 6/30/2012 Security % Net Assets CSI Properties, Ltd. 9.6 Soundwill Holdings, Ltd. 6.4 Hang Lung Properties, Ltd. 6.0 Holloway Lodging REIT 5.0 Wing Tai Holdings, Ltd. 4.8 Net Cash and Cash Equivalents 4.8 Wing Tai Properties, Ltd. 4.4 Alstria Office REIT AG 2.9 Astro Japan Property Group 2.8 Brookfield Canada Office Properties 2.6

These holdings may not reflect the current or future positions in the portfolio.

The statements and opinions expressed in the article are those of the author, as published by Barron’s on 08/11/2012. Forward does not guarantee the accuracy of opinions and content.

The fund seeks total return from both capital appreciation and current income.

You should consider the investment objectives, risks, charges and expenses of the Forward Funds carefully before investing. A prospectus with this and other information may be obtained by calling (800) 999-6809 or by downloading one from www.forwardinvesting.com. It should be read carefully before investing. RISKS There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate, and you may have gain or loss when you redeem shares.

Borrowing for investment purposes creates leverage, which can increase the risk and volatility of a fund.

Concentration in a particular industry will involve a greater degree of risk than a more diversified portfolio.

Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation.

Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio.

Investing in the real estate industry or in real estate-related securities involves the risks associated with direct ownership of real estate which include, among other things, changes in economic conditions (e.g., interest rates), the macro real estate development market, government intervention (e.g., property taxes) or environmental disasters. These risks may also affect the value of equities that service the real estate sector. Forward Funds are distributed by Forward Securities, LLC.

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