“In this environment, alternatives, perhaps once considered optional in investors’ portfolios, have become essential.” -Anton Pil, JP Morgan

With more uncertainty on the horizon, many buy-and-hold investors are shifting away from the traditional 60/40 stock and bond portfolio and are setting their sights on uncorrelated asset classes in alternative investments. Major firms, including JP Morgan, predict alternatives will become an essential part of post-pandemic portfolios. As Anton Pil, Head of Alternatives, J.P.Morgan Asset Management, said it, “In this environment, alternatives, perhaps once considered optional in investors’ portfolios, have become essential.”

Asset manager Nuveen with $1 trillion USD under management already has roughly a quarter of its investments in alternative options. “If you stick to a traditional portfolio, hitting your targeted returns over the next five or ten years is highly unlikely,” said Jose Minaya, CEO of Nuveen, in a recent interview with Reuters. Investors ideally would like higher returns like stocks but lower risk like bonds. Fortunately, direct private real estate has proven to be such an investment. Family Offices already hold close to 20% of their portfolio in real estate per the UBS Global Family Office Report 2019 and it has been gaining more traction in recent years. Keep in mind that family offices have the acumen, capital, and desire to take advantage of higher risk investments but they also want their wealth to be preserved throughout the generations.

So why is the shift away from a traditional stock and bond portfolio happening and why now? Well, investment returns with the traditional stock and bond portfolio over the next few decades are likely to be much lower than over the last century and the current environment is different:

1) Low yield environment: the Dividend Yield, or the dividends paid divided by the stock price, is much lower than it has been over the last century. And in 2022, as a result of aggressive Fed funds rate hikes to control inflation, bond values took a big hit.

2) High equity valuations: the current starting valuation, as measured by the Price-to-Earnings (P/E) ratio for the S&P 500 is approximately 21x, compared to around 15x over the last century.

3) Inflation: government policies to boost economic growth when COVID-19 hit have resulted in high inflation, reaching levels not seen in 40 years. In 2022, the Fed has been working to control inflation but it is unknown how long we will see inflation higher than what it had been prior to 2021.

4) New regulation: the JOBS Act passed in 2012 and it made the process of raising capital simpler and cheaper, and eventually made crowdfunding possible. Before the JOBS Act passed, you had to be rich and connected to invest in real estate syndication.

5) ‘Retailization’ of private markets: as a result of the regulation changes and new technology, private market opportunities that have only been accessible to accredited or institutional investors at a high minimum investment are increasingly opening up to the majority of the population.

Can one really reduce risk from their portfolio without sacrificing return? The answer is “yes.” Studies show that adding direct private real assets to a portfolio of stocks and bonds increased the return and decreased the volatility. Nuveen did some research using 28-year data ending in 2019. In their publication, “Improving portfolio diversification with uncorrelated market exposure,” they show why adding direct real assets, including commercial real estate, can be advantageous. They found that private direct investment in real assets offered strong return fundamentals and low volatility in comparison to U.S. stocks, international stocks, U.S. bonds, and REITS. They also noted the diversification benefit of direct real assets along with its ability to hedge against inflation.

With convincing results and the changing environment, more and more people are turning to real estate to truly achieve a balanced portfolio. Those that invest in multifamily real estate like the stable nature of this asset class and the diversification benefit of hard assets that are uncorrelated to the stock market in their portfolio. How much active or passive direct real estate do you have?

Let’s connect if you would like to learn more about how Bluefox Ventures can help you diversify your portfolio by investing in alternative assets like multifamily real estate.