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Real Estate In Client Portfolios

Investments

Most clients I see for the first time have an investment portfolio that’s exclusively made up of equities (stocks) and fixed income (bonds and cash).  This has served investors nicely since the financial crisis as US stocks and bonds have performed well for the last decade.  (Maybe too well.)

Supplementing investment portfolios with holdings that provide other sources of income and capital gains makes good sense.  I spend most of my investment research time looking for and tracking these types of holdings.  There is one area I’ve used for several years and continue to be excited about – “core” real estate.

I’ve used the Versus Capital Real Estate Fund in client portfolios for over four years.  The fund has several characteristics I like:

  • Accesses Private and Public Real Estate Assets – Some investors use REITs (Real Estate Investment Trusts) to get exposure to the real estate markets.  REITS only cover publicly traded real estate – this misses roughly 40% of the US real estate market.  Private real estate values are not subject to the daily fear/greed cycle of the public markets; this allows prices to be more stable.  Private real estate also has higher expected returns with their illiquidity premiums.
  • Invests Alongside Top Private Real Estate Investors – The fund splits its assets among 18 of the top institutional real estate funds (Clarion, RREEF, AEW, USAA, etc.).  These funds have successful investment histories, and they collectively invest in $106 billion in almost 1,200 properties.  The average size of their investments is $91 million.  These fund managers are unavailable to “retail” investors as they often require $10-$50 million in assets to get access to their strategies. 
  • Provides Wide Diversification – The fund is well diversified across funds, geographies and property types.

Geographic and Sector Breakdown

  • Uses Very Little Leverage – The fund has a 24% leverage ratio.  These low “loan-to-value” numbers safeguard against real estate market cycles.
  • Excellent Fund Structure – Most private real estate funds are structured as limited partnerships, and therefore have little transparency, infrequent pricing, multi-year lockups, high expense structures and complex tax reporting.  Versus’ interval mutual fund structure avoids these pitfalls.
  • Low Internal Expenses –  Accessing private real estate is not as easy as buying a stock or bond.  Versus’ 1.8% expense ratio is a very reasonable price to pay for access to this asset class.
  • Solid and steady returns – Since the fund’s inception in July 2012, the fund has had average annual gains of 6.8% after all expenses; this almost matches the “global 60/40” portfolio’s return of 7.1% for the same period.  Best of all, it’s done this with nearly one-fourth of the risk of a global portfolio.  The graph below shows how steady the fund has been.  


I recently had a meeting with one of the partners of the firm and attended a conference call with the Chief Investment Officer.  These due diligence meetings went well, and I continue to be excited about this holding looking forward.


Got a question about how real estate fits in your portfolio?  Give me a call.