From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for July 16th, 2020

ACCRE Mid-Month Report

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We started ACCRE back in 2017 with two ideas in mind. First, we wanted to “beat” the S&P 500 by 2 times. As of the end of June, a dollar we invested in ACCRE at the inception was worth $1.59. If we’d invested that same dollar in the S&P, it would only be worth $1.31. So, we’re two cents away from our goal, and that’s not too shabby. By the way, real estate in general has taking a pounding this year. That same dollar invested in the S&P Global Real Estate Index grew to $1.28 by January 1 of this year, and has now fallen to $1.03. OUCH!

Our second goal was to provide diversification and more to the point attenuate the risk in our overall portfolio. We measure that in two ways. The first way is to compute the Sharpe Ratio, which looks at the daily “excess returns” (the daily return over and above what we would have earned if we put the money in T-Bills) and divide that by the standard deviation of those returns (a common measure of risk). A higher Sharpe Ratio means that we are getting more bang for the buck when adjusted for risk. You can theoretically get very high returns if you a willing to risk high volatility, and the Sharpe Ratio accounts for that.

The next way of measuring diversification and risk attenuation is to measure the correlation with the S&P 500. In other words, does our fund move in lock-step with the rest of the market, or is it uncorrelated? Uncorrelated in this case is good — it means that we can use ACCRE to smooth out the variability in the rest of our portfolio without sacrificing returns. By the way, we compute correlation both from the inception of the fund and on a month-to-month basis.

S&P 500:
Average Excess Daily Return 0.0250%
Standard Deviation 1.3648%
Sharpe Ratio 1.8306%
Average Excess Daily Return 0.0455%
Standard Deviation 1.1412%
Sharpe Ratio 3.9850%
Overall Correlation 56.515%
Monthy Correlation, June, 2020 60.394%
ACCRE Metrics as of June 30, 2020

As you can see, we’ve consistently beaten the S&P 500 both on raw average daily excess returns but also on the Sharpe Ratio. Note that the standard deviation — the measure of volatility — is significantly lower for ACCRE than for the S&P. The correlations are positive, but considerably less than 100%, which suggests that while both have benefitted from this long Bull Market run, the two have followed somewhat different paths to profits.

These are complicated times for real estate. That said, a well selected and properly curated real estate portfolio, either in hard assets or securities, can provide above average returns, diversification, and risk attenuation. If we can answer any of your questions, or you just want to chat, please let me know.

Written by johnkilpatrick

July 16, 2020 at 12:10 pm

Posted in Uncategorized

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