As I noted last week, ACCRE continued with positive returns in May, even in the wake of a terrible month for the S&P. However, that only tells part of the story. REIT investment in general, and ACCRE’s philosophy in particular, provide significant diversification during troubled times as well as substantial excess returns.
First, the diversification story. Our good friend, Dr. Brad Case at NAREIT, wrote an excellent piece for REIT.COM back in January. In it he shows that REITs in general are historically highly uncorrelated with the market in general. For the uninitiated, if we can find an investment class which is uncorrelated with the market but offers positive excess returns, it is like “found money” for our portfolio. Dr. Case shows that REITs are typically between 50% and 70%, and in 2018 hardly got above 60%. ACCRE’s has a correlation to the S&P of 43.12%, measured since the inception of the fund. Click here for a full copy of Dr. Case’s article.
Adapted from Case (2019)
Of course, diversification only tells part of the story. ACCRE also provides positive excess returns, and in fact those excess returns have been significantly higher than the S&P since the inception of the fund. Excess returns, by the way, are a measure of how much you would have earned, on a daily-return basis, over and above what you would have earned if you had invested in something risk-free, such as t-bills. Specifically, since the fund began, ACCRE’s daily average excess return has been 0.062%, or 22.13% annualized. This compares to the S&P, which has averaged 0.012%, or 4.48% annually over that same period.
FInally, the Sharpe Ratio allows us to examine these returns in the context of risk. Specifically, we know that the S&P not only has lower returns, but also a high degree of volatility compared to those returns. The Sharpe Ratio allows us to quantify that risk. It is the ratio of average excess returns to the standard deviation of those returns. A higher Sharpe Ratio indicates more return (more “bank for the buck”) compared to risk. Not surprisingly, ACCRE’s Sharpe Ratio is 6.1%, compared to the S&P at 1.6% This may not sound like much, but it basically means that ACCRE is providing nearly four times as much return for every unit of risk.