Why Real Estate in a Bear Market?

Admittedly, we are not definitionally in a “bear market”.  Bear markets are marked by wide-spread pessimism, and usually begin with a sell-off of 20% from peak values.  That said, while we’re not technically in bear territory, the past few trading days have left investors shaken, if not stirred.

We have already told the story of how and why real estate attenuates and diversifies a portfolio, and adds significant returns without volatility in bull markets.  But, what happens when the bears come to visit?  Just a snapshot, I compared the value of our portfolio with the S&P over the past 10 trading days, with both indices normalized to 100 as of the close of business on 11/7.  The results are remarkable:

Note that the ACCRE value is down about 1.3% over the past 10 trading days, but the S&P has declined about 6.1% — over 4 times the rate of decline.  (By the way, ACCRE is up 2.4% so far in November!) Further, ACCRE has exhibited little if any volatility, but for the past two days.  We expect ACCRE will turn in positive returns for the month, and stay in bull territory going forward.  Those of us with ACCRE in our portfolios are stirred, but not shaken right now.

So, why the difference?  There are several important reasons why real estate attenuates a down market.  Three of these are:

  1. Carefully chosen real estate is usually backed by long-term commitments which transcend short bear runs.  People still need places to live, to work, to store stuff, and to go see the doctor.  If you chose the real estate carefully in a bull market, the same fundamentals continue to hold in a bear market, at least in the intermediate term.
  2. REITs are cash-cows, and behave a bit like bonds.  What’s more, this means that when markets slope downward, there is at least a slight disincentive for regulators to put the squeeze on interest rates, thus benefitting rate-sensitive investments like REITs.  (Note that the similarly-rate-sensitive DJ Utilities are only down about 2.6% during this same 10-day trading window, and in fact have rebounded about 1.8% during this sell-off.)
  3. Real estate is a serious, core investment, and not a trading asset.  As such, real estate is the last thing sold off and continues to be accumulated by serious-minded investors.  Thus, real estate values reflect actual long-term fundamentals and not the whims of the trading strategy du jour.

We’re not knocking tech stocks, and truth be known, we personally own a few.  That said, our serious money is, and continues to be, in real estate.

Fund Status for October, 2018

First, please accept our apologies for not producing a public entry for the end of September.  We were busy working on the backend of the web site, getting it ready for public subscribers, and communicated with all of our subscribers via e-mail during this period.

The past two months stunk for the stock market in general. That said, ACCRE as a diversification tool proved its worth. To reflect, in September, the S&P slightly nudged us out (+0.43% return versus – 3.61% for ACCRE) but then the S&P tanked in October (-6.94% versus -2.25% for ACCRE). Cumulatively, ACCRE continues to hold a substantially winning hand. $1 invested in ACCRE at the inception would be worth $1.34 today – not quite as good as the peak in June ($1.43) but certainly much better than the S&P performance over that same period ($1.15). The overall REIT performance has been lackluster ($1.05), showing that the ACCRE managed strategy continues to dominate.

October 2018

Even more telling are the continued results from computing our Sharpe Ratio.  ACCRE continues to dominate the S&P, and the numbers are actually moving in ACCRE’s favor.   Note the comparisons below:

Sharpe Oct 2018

Thus, ACCRE’s average daily excess returns continue to dominate the S&P, and the price paid for those returns, in terms of volatility, continues to decline.  Indeed, thanks to the major market movements in the S&P over the past 2 months, the overall market Sharpe ratio has declined significantly, while ACCRE’s continues to increase.

Finally, we’ve also computed the Beta for ACCRE, based on daily returns since inception versus the S&P, which is 57.85% as of the end of October, 2018.  This is not surprising, given the Sharpe ratio results.  ACCRE continues to dominate the S&P returns, and with lower volatility to boot.

John A. Kilpatrick, Ph.D.