Sample Portfolio Analysis: EquityMultiple vs the S&P 500
EquityMultiple offered its first investment in late 2015. The S&P 500 has generally had a good run over this period: 9.6% average annualized returns; 11.6% with dividends reinvested. As we have discussed, private-market real estate can potentially provide lower volatility and a critical alternative source of yield and total return. So, over this timeframe, how do volatility and total return compare when stacking up EquityMultiple investments against the S&P 500?
Relative Total Returns
The S&P didn’t have a great 2015. Even if we cut the stock market a break and compare returns from 2016 through today, EquityMultiple looks far stronger.
|EquityMultiple Investment Returns vs the S&P 500|
|Total dollar weighted avg. net IRR, EquityMultiple investments||17.7% IRR|
|Net weighted average annualized return, EquityMultiple cash-flowing investments||9.96%*|
|S&P 500 average annual return, 2016-2022||11.38%**|
|Avg. annual distributions from dividend stocks in S%P 500, 2016-2021||1.78%|
*as of 6/29/22
**as of 10/31/22, with the 2022 return figure weighted down appropriately
Note that this is not an apples to apples comparison; the stock market return figure is an average annual return, whereas the EquityMultiple total return figure is the dollar-weighted net IRR of all realized investments.
What about the cash-on-cash return of EquityMultiple investments? Through the first half of 2022, this figure sits at 9.96%. Again, this is not a perfect apples-to-apples comparison — the weighted average annualized return of EquityMultiple investments reflects cash distributions to EquityMultiple investors on a monthly or quarterly basis, whereas the majority of returns in the S&P come from appreciation rather than income. The average annual distributions from dividend stocks in the S&P 500 for the years 2016-2020 was 1.78%.
While these comparisons are not perfect, putting these figures side by side clearly shows that allocation to EquityMultiple investments may provide an appealing alternative or supplement to the stock market, both in terms of cash flow and total return potential.
What about variance?
Private-market real estate investments can deliver a wide range of results. While EquityMultiple seeks the maximum degree of investor protections and rigorously vetted, conservatively modeled investments, unforeseen challenges (such as COVID-19) may challenge investments. Conversely, better-than-base-case conditions may yield outsized returns, well beyond projections. Accordingly, EquityMultiple investments have yielded realized returns ranging from loss of principal to net IRRs of over 100%.
How does the variance of EquityMultiple investment performance stack up against returns of the S&P 500? An apples-to-apples comparison isn’t available, as we would be comparing one-off illiquid investment performance to an index of liquid traded equities.
Coefficients of variation measure the standard deviation vs. the average (return, in this case). The coefficient of variance for EquityMultiple investments, all-time, is almost identical to the S&P 500’s annual figure from 2015-2021. Again, by no means an apples-to-apples comparison, but it’s helpful context. Think about it this way: you could expect a randomly selected annual bucket of EquityMultiple investments to bear a statistically equivalent variance to the stock market.
|EquityMultiple Coefficient of Variation vs the S&P 500|
coefficient of variation for dollar-weighted avg. net IRR
|S&P 500: Coefficient of variation for annual performance,|
What about more recently? Since the start of the pandemic, stock market performance was unexpectedly strong before the tumult of 2022 wiped out prior gains. 2022 has been the worst year on record for the 60/40 portfolio, while volatility has been the norm over the past several months.
EquityMultiple investments originated and exited since March 2020 (the beginning of the COVID-19 pandemic and recovery period) have yielded a weighted average net IRR of 32% to EquityMultiple investors, with a coefficient of variation of 1.25. In other words, more recent EquityMultiple investments have shown even less volatility.
In other words, across our operating history, the risk-adjusted return of EquityMultiple investments has exceeded that of the S&P 500, and by a wide margin between March 2020 and the end of Q3, 2022.
Bringing it back around: asset allocation
Over a long enough timeframe, broad allocation to the stock market almost certainly pays off. However, entry, exit, and withdrawal timing may have an outsized impact on total benefit to an investor (as noted in our whitepaper on retirement strategy). Similarly, a single investment in a single EquityMultiple investment would not be our recommended real estate allocation strategy. In terms of both your EquityMultiple portfolio and your broader asset allocation, diversification is preferred.
Unsurprisingly, more diversification in an EquityMultiple portfolio pays off, per our historical performance data. Looking at all investor portfolios with 10+ investments, average returns exceed our overall aggregate net IRR figure, and variance in realized return is lower than overall:
- 20% average net IRR for investors with 10+ investments
- 0.97 coefficient of variation in portfolio-level total return among these investors
The 50/30/20 portfolio
EquityMultiple investments have yielded a 32% dollar-weighted total net IRR during the pandemic, with favorable exits here and there throughout the past 2.5 years. Results for the stock market have been much more mixed. A diversified portfolio of private-market alternatives, like the CRE investments available on EquityMultiple, can provide supplemental cash flow, uncorrelated total returns, and periodic injections of upside to balance a traditional 60/40 portfolio.
Recent work by JP Morgan, using real asset performance data, corroborates this theory: adding alts (like real estate) to a traditional portfolio of stocks can improve the risk-adjusted return of the portfolio. This enhancement through alternatives is part and parcel of modern portfolio theory: moving up the efficient frontier through reducing cross-asset correlations.
|40 Equities/60 Bond||6.49%||7.86%|
|60 Equity/40 Bond||9.38%||8.87%|
|80 Equity/20 Bond||12.54%||9.76%|
|30 Equity/40 Bond/30 Alts||6.33%||8.89%|
|40 Equity/30 Bond/30 Alts||7.81%||9.40%|
|50 Equity/20 Bond/30 Alts||9.36%||9.88%|
Looking closely at the data, you can see that moving from the “traditional portfolio” constructs to a similar stocks/bonds breakdown alongside a 30% allocation to alternatives, like private real estate, shows lower volatility and higher annualized returns over the analyzed period versus the equivalent traditional portfolio.
For example, shifting a 60/40 stocks/bonds portfolio to 40/30/30 (stocks, bonds, alternatives) reduced volatility from 9.38% to 7.81% while increasing annualized returns from 8.87% to 9.4%.
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