While there are still some macroeconomic impacts affecting real estate markets outside the US, in the US market we believe commercial real estate fundamentals are relatively strong, and companies are beginning to be rewarded based on their fundamentals. Our view is supported by two trends we've seen this year: The market is starting to favor higher quality real estate companies with stronger balance sheets and those companies that can generate growth through development and redevelopment activity.
A shift toward higher quality
As we pointed out previously, up until the global financial crisis, the market generally favored companies with stronger balance sheets over more highly leveraged companies. But that changed in 2009 and 2010 as interest rates fell and more highly leveraged companies with relatively poor balance sheets were able to refinance their debt cheaply. With interest rates having been so low for so long, we believe much of that refinancing has taken place. So this year, we've seen the market come back to our view that higher quality companies with stronger balance sheets offer a greater potential for growth going forward. The holdings in our portfolio tend to have better balance sheets and they also tend to have higher growth rates. We believe they're attractively valued relative to their growth rates and we're pleased that the market is now catching up with our point of view. Currently, this is more evident with US REITs; however, we believe this will eventually become the case in global real estate securities as well.
This is best illustrated in the following chart, which shows the performance of real estate stocks for the period beginning in the third quarter of 2013 to the end of the second quarter of 2014, for the respective indexes of global real estate securities, US REITs and ex-US or international real estate securities. Stocks that rank above 5 are suitable for investment by our fundamental ranking process. This tends to encompass companies operating in the most attractive markets with quality properties, strong management teams and sound balance sheets. Stocks that rank below 5 tend to represent weaker or higher risk companies. In the US, higher quality companies are beginning to be rewarded with better performance over the last year. Outside of the US, companies are not necessarily being rewarded on the basis of fundamentals, but are being driven by more macro factors.
Internal growth leads the way
Another trend we see in the real estate market this year is the increasing difficulty commercial real estate companies are facing as they seek to complete potential acquisitions. Strengthening commercial real estate fundamentals, coupled with the low cost of financing, have resulted in a large increase in the number of bidders for assets in the past several quarters. In some cases, public real estate companies must compete against other buyers that may have a lower cost of capital. This trend has been most pronounced in the US and other developed countries.
In light of this trend, we believe that commercial real estate companies that traditionally have relied on acquisitions to drive growth are at somewhat of a disadvantage to those companies with better internal growth prospects. The former category includes many companies in the health care, triple net leases and diversified REIT sectors, and it explains why our portfolio is underweight such companies and sectors. We see such companies, which may be acquiring properties at potentially higher prices due to the current market environment, as less likely to generate growth and create value for investors going forward.
Instead, we favor development-focused companies that can drive growth and create value by using their capital and management expertise to develop new properties or to redevelop existing properties. We've actually increased our holdings of such companies in recent quarters. We look not only for development-focused companies; we also carefully examine the types of development projects in which they are engaged and the outlook for the markets in which they are active. We believe these companies, if they manage their development and redevelopment activities well, are likely to have higher growth rates and create greater value for investors than companies that simply own and manage their own real estate portfolios or companies that acquire properties from competitors.
