2020 was one for the record books in every way imaginable. In a market defined by relentless volatility, exhaustively low interest rates, and unprecedented responses to monetary policy, investors who did not cut bait exhaled a sigh of relief as markets recovered, while others lamented their succumbing to the panic and short-term pain of watching their portfolio in free-fall.
Last year should serve as a constructive reminder that the fast-moving markets are fragile and always prone to shockwaves triggered by familiar economic events, much less a once in a century pandemic. At Humphreys Capital, we’ve realized great value by investing in private, actively managed real estate funds. These funds allow investors to build wealth and enjoy stable income over the longer term.
Looking ahead to how we will deploy capital in 2021, we plan to execute our strategy consistent with how we’ve invested in each of the past nine years. Strong markets, resilient sectors, best-in-class partners. Same strategy, different year. Rinse and repeat. For those who continue to fret over the uncertainty that traditional markets bear, I’d like to propose just a few of the reasons to consider adding exposure to a privately managed and well-diversified real estate fund.
1. Stability in a Volatile Environment
Compared to equity markets, real estate values do not change rapidly nor tend to correlate with public markets.
Investments in private real estate are not subject to the hourly re-pricing that public securities are subject to, including listed REITs. Driven often by market sentiment and from time-to-time, fundamentals, instantaneous price movements can place undue risk on a portfolio. Using arguably an extreme circumstance as an example: From the peak of the market on February 19, 2020 through the month of April 2020, the S&P 500 traded in excess of 2% (in either direction) of the previous day’s close on 31 out of the 51 days, while the FTSE NAREIT Equity REITs Index traded 28 days during the same period.
While it’s rational to allocate to public markets, it’s also critical to weigh the risk of over-exposure, particularly for the patient investor with less need for liquidity and a preference for gradual if not predictable returns in their investment portfolio. By valuing a private real estate fund on a scheduled basis, asset price adjustments pair with the cash distributions already being received to generate smoother and more predictable total returns.
The Humphreys Real Estate Income Fund has made 104 uninterrupted monthly distributions since its formation in 2012 and runs a thorough valuation process once a year, historically providing stable cash returns and long-term capital appreciation along the way.
2. Protection Against Inflation
Diversified real estate investments can combat the threat of rising inflation.
Historic responses by the Fed in 2020 and predicted continued quantitative easing in 2021 will only exacerbate the money supply, which grew 5x faster than its average over the past 40 years. The consumer price index suggests modest inflation is occurring today. However, there are multiple arguments to be made that inflation beyond the Fed’s 2% target (CPI currently says 1.4%) is happening all around us. Meanwhile, the purchasing power of cash, fixed income, and all other intangible assets are dripping away.
Hard assets like precious metals, commodities, infrastructure, or real estate have an intrinsic value stemming from their tangible usage and relatively high demand. In most cases, hard assets are required for an acceptable quality of life, if not necessary for survival. Owners of real estate can respond to the market by periodically adjusting rent, with the potential to increase cash flow in an inflationary environment. All the while, the uplift in value is offsetting long-term impacts that plague otherwise non-hard or intangible assets like financial assets.
The Humphreys Real Estate Income Fund consists of over 70 income-producing properties located in some of America’s most fundamentally strong markets, where prosperous people and organizations are seasonally renewing leases that drive income growth and value of our investments.
3. Consistent Risk-Adjusted Returns
Over the past 9 years, we’ve seen how a private real estate fund, when diversified across markets and property sectors, can mitigate risk and deliver consistent and resilient returns to investors.
“When prices are high, it’s inescapable that prospective returns are low (and risks are high)” – Howard Marks
The ability to earn repeatable risk-adjusted returns at this stage in the market is getting harder by the day. The liquidity injected by the Federal government has provided the necessary market support through the dog days of COVID, but not without leaving little room for growth or income. As a consequence, investors become compelled to push themselves further out on the risk curve to one extreme or preserve cash in riskless assets to the other. Either way, finding adequate returns to compensate for the risk of principal loss or purchasing power has become more challenged than ever.
Suppose you generally subscribe to efficient market theory, suggesting all information is available, and asset prices reflect that information at all times. If so, you might also support the view that private markets work in a secluded environment of evolving inefficiencies. This reality can position private real estate funds with an opportunity to leverage those dislocations and generate superior risk-adjusted returns. As private managers explore markets with strong fundamentals, discreet information can be sourced from local relationships, creating the competitive edge that can lead to more attractive acquisition costs and greater potential for income growth and value creation.
The Humphreys Real Estate Income Fund has consistently produced stable, tax-efficient risk-adjusted returns for its investors. Since 2012, the fund has provided investors with a 13.6% net IRR, including over two-thirds in monthly cash distributions and the balance in capital appreciation. While HREIF has produced comparable average annualized returns to the S&P 500, it has done so with considerably less volatility.
Humphreys Capital’s approach to private equity real estate is offered as an attractive investment option for high net-worth individuals. Now, with the reopening of the Humphreys Real Estate Income Fund (HREIF), there’s yet another reason to add private equity to your portfolio this year. To learn more about the HREIF, call 405-228-1000 or click here.
This article was written by Justin Lewellen, Director of Investor Relations.
This material is for informational purposes only. It does not constitute an offer to sell, or a solicitation of offer to buy, any securities nor is it intended to be a description of all material factors an investor should consider before investing with Humphreys Capital. Prior to making an investment decision, prospective investors should carefully review all documents for a description of material factors to consider, including risk factors and investor suitability requirements. Nothing in this presentation should be construed as investment, legal, tax or other advice. You should consult your own advisers as to legal, business, tax, and other related matters.
Past performance may not be indicative of future results. Performance information and certain projected/forecasted amounts contained in this report include assumptions that the Manager believes are reasonable under the circumstances. There is no guarantee that the conditions on which such assumptions are based will materialize as anticipated and will be applicable to these investments. Actual transaction conditions may differ from the assumptions and such differences could be material. Among other assumptions, calculating projected/forecasted returns involves applying current market conditions and investment strategy with comparable historical results. Historic results are not reliable indicators of actual future performance of any particular investment or the Funds. Investors should be aware that projected/forecasted returns are hypothetical and do not reflect the impact that future material economic and market factors might have on the decision-making process, and there is no guarantee that the projected/forecasted returns will be achieved. Investing involves varying degrees of risk, and diversification does not assure a profit or prevent loss.
Any projections, estimates, forecasts, targets, prospects, returns and opinions contained in this presentation involve elements of subjective judgment and analysis and are based upon the best judgment of the Manager as of the date of this presentation, are subject to change without notice, and may differ or be contrary to opinions expressed by others. Neither the Manager nor any other person takes any responsibility for, and no reliance should be placed on, any valuations, forecasts, targets, estimates, opinions, or projections contained in this presentation.
HREIF distributions payable to investors are determined and approved by the Fund’s Board of Directors (the “Board”). Dividends, while pre-determined and communicated, are not guaranteed; the Board has discretion to reduce or cancel dividends based on economic conditions and other circumstances.
Gross returns do not reflect the deduction of any management fees, incentive fees, and expenses. Net returns include the deduction of all management fees, incentive fees and expenses paid during the period reflected. The Fund's net Internal Rate of Return ("IRR") is an annualized return calculated with the sum and timing of investors' capital contributions and distributions to investors net of management fees, Fund expenses, and manager's return using a terminal value as of 12/31/2020.