Opinion: Cash is Not Always King. Here’s Why We Think Alternatives are a Better Bet.
About the State of the Market
Due to current macroeconomic concerns, many retail investors are wary of investing in the public market (including stocks and REITs) and investments more broadly. The main drivers of our current economic conditions; the war in Ukraine, lasting supply chain shortages, and rising rates and persistent inflation, have stoked fears of a possible recession. To this point, purchases of exchange traded funds (ETFs) fell in April to their lowest level since the start of the pandemic in March 2020.¹ Stock and bond mutual funds have also begun seeing outflows of tens of billions of dollars a week as of late May.²
While a reflexive pull back from the equities market is a natural reaction to the current uncertainty, we believe this is an opportune time to diversify into alternative assets, such as real estate.
Opportunities in Alternative Investments
EquityMultiple’s mission is to provide our investors with opportunities and strategies typically limited to institutional investors. According to Natixis, 78% of institutional investors say there is still a significant delta between private assets and public markets, and 85% of institutional investors anticipate increasing or maintaining their allocations to real estate investments.³
Many institutional investors have now pivoted away from the traditional 60/40 portfolio allocation toward a 50/30/20 or even a 40/30/30 ratio, where 20-30% of one’s portfolio consists of alternative investments such as real estate. Here are a few reasons why we think it may be smart for individual investors to mimic this strategy in their own portfolios:
Potential Hedge Against Inflation
The real estate asset class has historically been more resilient to inflation than public stocks.4 In fact, KKR notes that real estate returned similar nominal returns in both high inflation and low inflation environments (9.9% versus 11% from 1978-2021).4 Comparatively, U.S. Equities returned on average 4.2% in nominal terms in inflationary periods, versus 13.9% in nominal terms in non-inflationary periods (from 1928-2021).4 For more insight into how private real estate can serve as a hedge against inflation, please review this article.
Stable Source of Recurring Income
As inflation rises, consumers often cut back on purchasing certain goods and services. This can lead to volatility in public equities and other commodities, which are closely tied to the Consumer Price Index (CPI). Per KKR, higher commodity pricing should lead to increased demand for collateral backed cash flows as inventors move to owning pricing power assets.5 A great example of this is multifamily real estate, which is partially insulated from this same pressure, as people will always need a place to live.
To put this another way, private real estate does not operate on the same short-term basis as stocks. Landlords can generally count on tenants to pay rent consistently each month. When their lease is up for renewal, it is a common practice to then raise rent for the following year(s), which can and will capture (a portion) of overall market inflation.
Greater Portfolio Diversification:“To think like an allocator is to acknowledge that a healthy portfolio consists of different risk factors that take on distinct roles to help achieve the overall objective.” – John L. Bowman, CFA, CAIA Association6
At EquityMultiple, we believe in the value of portfolio diversification. Two recently released reports by Wilshire Trust Universe Comparison Services and BNY Mellon’s Master Trust Universe found that investors with higher allocations to alternative investments outperformed those with traditional asset allocations.7 According to the data, which includes 457 corporate, foundation, endowment, public, Taft-Hartley and health care plans, real estate was the only positive performer, with a median return of 5.24% in the first quarter of 2022.7
“Endowments benefitted from their above average allocation to real estate and other alternative investments of 60% versus the Master Trust median allocation of 32%,” says Frances Barney, head of global risk solutions at BNY Mellon.7
The Bottom Line
With the rise of online platforms like EquityMultiple, we believe it is now easier than ever for individual investors to access alternative asset classes and build a well-balanced portfolio.
We believe investors looking to enhance a traditional 60/40 portfolio should consider diversifying into alternative assets. A portfolio that skews heavily into the stock market, for instance, will likely no longer provide the same high returns in current conditions. From our analysis, even bonds, which investors have historically turned to for stability, may produce diminished returns as the Fed increases interest rates. By rebalancing these ratios and introducing new asset types, investors can potentially improve the resiliency and performance of their overall portfolio.
That said, every investment involves some risk. A detailed look into EquityMultiple’s Investment Opportunity Matrix by risk level, current yield, and other considerations is forthcoming.
¹Source: FinancialTimes (as of May 8, 2022).
²Source: Wall Street Journal (as of May 26, 2022).
³Source: Natixis (as of December 2021).
⁴Source: KKR (as of May 2022). Past performance is no guarantee of future results. There can be no assurance that any investment will achieve its objectives or avoid substantial losses.
5Source: KKR (as of June 16, 2022).
6CAIA Association (as of March 24, 2022).
7Chief Investment Officer (as of June 2, 2022). Past performance is no guarantee of future results. There can be no assurance that any investment will achieve its objectives or avoid substantial losses.
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute EquityMultiple’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of EquityMultiple, are based on current expectations, estimates, opinions and/or beliefs of EquityMultiple. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
Certain information contained in this presentation has been obtained from third parties. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of EquityMultiple or its affiliates take any responsibility for such information. Certain information contained in this presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.
Any model, graph or chart used has inherent limitations on its use and should not be relied upon for making any investment decisions. Nothing herein should be construed as an offer, or a solicitation of an offer, to invest in or buy an interest in any investment vehicle managed by EquityMultiple
Certain information contained in this document constitutes a “forward-looking statement,” which can be identified by the use of forward-looking terminology, such as “may,” “will,” “seek,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” “believe,” or the negatives thereof or other variations thereof or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements, including a complete loss of investment.
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