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COHEN & STEERS
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SPECIAL EQUITY FUND
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QUARTERLY REPORT
SEPTEMBER 30, 2000
COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
October 20, 2000
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Special Equity
Fund for the quarter ended September 30, 2000. The net asset value per share on
that date was $26.42. Regular dividends are reviewed semi-annually; therefore,
no dividend was declared for the quarter. The Board of Directors will review the
next regular dividend in December.
INVESTMENT REVIEW
During the quarter ended September 30, 2000, Cohen & Steers Special Equity
Fund had a total return of 14.3%. The Fund outperformed both the NAREIT Equity
REIT Index*, which had a total return of 7.7%, and the Standard & Poor's 500
Index, which had a total return of - 1.0%. For the nine months ended September
30, 2000, the Fund's total return was - 0.9% versus 21.8% for the NAREIT Equity
REIT Index and - 1.4% for the S&P 500.
The Fund delivered strong performance in the third quarter. While the equity
market environment was quite difficult -- the NASDAQ Composite ( - 7.4% return)
performed much worse than the broader market -- real estate securities performed
extremely well. In addition, two of the three investment themes outlined in the
Fund's semi-annual report worked well in the quarter: 1) the Health Care sector,
which is finally beginning to see a recovery in fundamentals; and 2) real estate
securities expected to out-perform in a 'soft-landing' economic environment.
The largest contributor to performance came from the Fund's holdings in the
Health Care sector, a 'down-and-out' sector for which we expect improving
fundamentals. These holdings are concentrated in nursing homes. Medicare
reimbursement is an important economic driver for nursing homes, and we expect
that Congress will increase funding soon for the third time in the past twelve
months. Standout performers were Ventas, which returned 56.1%, and Manor Care,
which returned 124.1%. Ventas, a large nursing home REIT, was also positively
impacted by developments at its principal tenant/operator Vencor, which recently
submitted its plan of reorganization in bankruptcy. The proposed terms for
Ventas' rent payments and its equity participation in Vencor are slightly better
than our expectations.
After the Health Care sector, the next largest contribution to performance
came from a group of real estate securities that we believed would perform well
once the Federal Reserve finishes raising interest rates. Now seventeen months
after the Fed began raising rates, evidence is beginning to show that economic
growth is moderating. Accordingly, consensus thinking embraced the
'soft-landing' economic scenario during the quarter, which, we believe,
positively impacted our holdings in the Homebuilding and Office sectors.
Real estate securities continued the rally that began in March of this year,
driven in part by accelerating fundamentals. At the latest reading for the
second quarter 2000, year-over-year cash flow growth was 10.2%, up from the
low-point of 7.9% hit in the fourth quarter of 1999. This improvement in growth,
amidst an environment where corporate earnings disappointments are occurring
daily, has increased demand for real estate securities while the supply, or the
amount of shares outstanding, has actually declined. Even though valuation
multiples have expanded in the rally, valuations have not yet become an
impediment to performance, as strong earnings and net asset value growth have
accompanied rising share prices.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
INVESTMENT OUTLOOK
Looking at real estate fundamentals, the discipline of the capital markets
has restrained new construction, which makes us worry less that overbuilding
might be the culprit that undermines fundamentals. This leads us to the demand
for real estate, or the economy, as the most important variable that will
influence real estate fundamentals going forward. According to Morgan Stanley
Dean Witter's economic forecast, U.S. GDP growth will peak in 2000 at 5.3% and
decelerate to 3.4% in 2001. While the soft-landing economic scenario appears
intact, the direction of change is down, and several factors -- such as spiking
energy prices, monetary tightening by central banks around the globe, and
widening credit spreads -- have increased the risks in U.S. economy.
If accelerating U.S. economic growth was the catalyst that boosted real
estate fundamentals and REIT sector performance in 2000, what will decelerating
economic growth mean for real estate fundamentals in 2001? In low barrier
markets, where it is easy to build and a healthy amount of supply has been
delivered the past few years, we could see rising vacancy rates and rent
declines in some property types. In high barrier markets, we do not see much
risk to current occupancy rates, but the high pace of rent growth likely will
moderate. One byproduct of a slowing economy would be even greater restraints on
capital for new development. As opposed to prior cycles when property markets
were overbuilt before the economy headed south, occupancy rates today are very
strong, and if development shuts off quickly -- and we believe that it
will -- we would expect that fundamentals would hold up fairly well.
INVESTMENT STRATEGY
While the direction toward slower economic growth appears fairly clear, it
remains to be seen whether the issues facing our economy and capital markets
will result in a benign soft landing, or a more material slowdown. Considering
these scenarios, several changes to our portfolio strategy are in order. The
most obvious change is to reduce weightings in the most 'cyclical' companies
whose earnings may be negatively affected by a slowing economy -- most notably
the Hotel and Homebuilding sectors. The second change, which is predicated on a
view that slowing growth may increase the importance of current income in the
total return equation, is to reduce weightings in securities have little or no
current dividend income. Further bolstering the case for more current yield, a
slowing economy should allow bond yields to ultimately fall, which should make
REITs that have secure dividends more attractive. Accordingly, we would expect
to increase our weighting in REITs, which are required to distribute nearly all
of their earnings as dividends.
REIT sectors that should perform well in a slowing economy include the
Health Care, Manufactured Home Community, and Industrial sectors -- by virtue of
their stable demand fundamentals and attractive relative valuations -- and we
expect add to these areas going forward. Notwithstanding recent performance, we
still see several ways to 'win' with the Health Care sector. The recovery in
fundamentals for these companies could take several years to unfold, and their
securities should be strong performers in a slowing economy due to their stable
underlying demand and high dividend yields. The Office sector, by virtue of its
long lease terms and built-in rental growth, will continue to be an area of
focus, but we will be more discerning for companies where valuations are high
and do not provide any cushion for slowing growth.
In closing, we are pleased with the Fund's performance this quarter. In
addition, we are pleased with the state of the real estate securities market.
While the number of public companies has declined this year due to
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
merger activity and privatizations, we believe the remaining companies are
getting stronger in terms of corporate decision-making, business and financial
planning, and corporate governance. We admit to being perplexed by the modest
inflows into real estate mutual funds (about 5% growth this year), especially
considering the strong performance by real estate securities relative to the
market indices. Looking at mutual fund flows as a contra-indicator, however, we
believe that real estate securities can continue to provide attractive returns.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
JOSEPH M. HARVEY
Portfolio Manager
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Cohen & Steers is now online at WWW.COHENANDSTEERS.COM. Visit our
website for daily NAVs, portfolio information, performance information,
recent news articles, literature and insights on the REIT market.
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* The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly-traded REITs that invest predominately in the equity
ownership of real estate. The index is designed to reflect the performance of
all publicly-traded REITs as a whole.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF % OF
SHARES VALUE NET ASSETS
--------- ----------- ------------
<S> <C> <C> <C> <C>
EQUITIES
*Alexander's..................................... 62,200 $ 5,084,850 15.03%
Ventas.......................................... 1,012,400 5,062,000 14.96
*FrontLine Capital Group......................... 158,700 2,608,631 7.71
Starwood Hotels & Resorts Worldwide............. 77,600 2,425,000 7.17
Vornado Realty Trust............................ 42,400 1,574,100 4.65
*Manor Care...................................... 97,500 1,529,531 4.52
Equity Office Properties Trust Co. ............. 49,000 1,522,062 4.50
**Brookfield Properties Corp. .................... 91,300 1,471,504 4.35
Crescent Real Estate Equities Co. .............. 65,300 1,457,006 4.31
Health Care Property Investors.................. 49,100 1,454,588 4.30
General Growth Properties....................... 42,200 1,358,312 4.02
Centex Corp. ................................... 36,400 1,169,350 3.46
Kaufman & Broad Home Corp. ..................... 41,300 1,112,519 3.29
Nationwide Health Properties.................... 69,300 1,104,469 3.27
SL Green Realty Corp. .......................... 38,400 1,077,600 3.19
*Six Flags....................................... 31,300 485,150 1.43
*Crescent Operating.............................. 261,400 310,413 0.92
*Allied Riser Communications..................... 34,100 225,913 0.67
CBL & Associates Properties..................... 5,000 125,312 0.37
*CAIS Internet................................... 21,700 105,788 0.31
Kilroy Realty Corp. ............................ 1,100 29,356 0.09
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TOTAL EQUITIES (Identified
cost -- $31,196,665) .................... 31,293,454 92.52
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<CAPTION>
PRINCIPAL
AMOUNT
---------
COMMERCIAL PAPER
<S> <C> <C> <C>
International Lease Finance Corp., 6.51%, due
10/2/00....................................... $834,000 833,849 2.46
Panasonic Finance, 6.51%, due 10/2/00........... 834,000 833,849 2.46
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TOTAL COMMERCIAL PAPER (Identified
cost -- 1,667,698)....................... 1,667,698 4.92
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TOTAL INVESTMENTS (Identified cost --$32,864,363)... 32,961,152 97.44
OTHER ASSETS IN EXCESS OF LIABILITIES............... 865,960 2.56
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NET ASSETS (Equivalent to $26.42 per share based on
1,280,293 shares of capital stock outstanding).... $33,827,112 100.00%
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</TABLE>
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* Non-income producing security.
** Brookfield Properties Corp. is a Canadian company listed on the Toronto and
New York Stock Exchanges. The Toronto Stock Exchange is deemed the princial
exchange for valuation purposes. The market value of the Fund's position in
Canadian dollars on September 30, 2000 was $2,214,025 based on an exchange
rate of 1 Canadian dollar to 0.66463 U.S. dollars.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS'D'
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/99................ $43,028,881 $26.76
Net investment income.................... $ 801,506 $ 0.62
Net realized and unrealized loss on
investments........................... (1,707,031) (0.88)
Distributions from net investment
income................................ (114,555) (0.08)
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Capital stock transactions:
Sold................................ 2,499,959
Distributions Reinvested............ 73,789
Redeemed............................ (10,755,437)
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Net decrease in net asset value.............. (9,201,769) (0.34)
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End of period: 9/30/00....................... $33,827,112 $26.42
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</TABLE>
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'D' Financial information included in this report has been taken from the
records of the Fund without examination by independent accountants.
AVERAGE ANNUAL TOTAL RETURNS
(PERIODS ENDED SEPTEMBER 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR SINCE INCEPTION (5/8/97)
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<S> <C>
28.09% 5.41%
</TABLE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
OFFICERS AND DIRECTORS
Robert H. Steers
Director and Chairman
Martin Cohen
Director and President
Gregory C. Clark
Director
George Grossman
Director
Jeffrey H. Lynford
Director
Willard H. Smith, Jr.
Director
Elizabeth O. Reagan
Vice President
Adam Derechin
Vice President and Assistant Treasurer
Lawrence B. Stoller
Assistant Secretary
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND SUB-ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
DISTRIBUTOR
Cohen & Steers Securities, Inc.
757 Third Avenue
New York, NY 10017
NASDAQ Symbol: CSSPX
Website: www.cohenandsteers.com
Net asset value (NAV) can be found in
the daily mutual fund listings in the
financial section of most major
newspapers under Cohen & Steers.
This report is authorized for delivery
only to shareholders of Cohen & Steers
Special Equity Fund, Inc. unless
accompanied or preceded by the
delivery of a currently effective
prospectus setting forth details of
the Fund. Past performance, of course,
is no guarantee of future results and
your investment may be worth more or
less at the time you sell.
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STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as.....................................'D'
