Seeking Alpha

I Put Half Of My Net Worth Into These Investments

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Includes: AUKNY, BAM, BEP, ET, FPI, HASI, MMP, O, PAC, SPG, SPY, STAG, SYDDF, WY
by: Jussi Askola
Summary

The great majority of investors allocate most of their wealth into financial assets such as stocks, bonds and cash.

I favor real assets instead with large investments in real estate, energy pipelines, farmland, windmills, and other.

While investing in real assets may have been reserved to high net worth individuals in the past, today there exists a lot of publicly-traded alternatives.

Below I explain five reasons why I invest more than 50% of my net worth in real assets and how you can do it too.

Most investors allocate the majority of their wealth into financial assets such as stocks, bonds and cash. Financial assets are convenient because they are liquid and can be traded in a few clicks of mouse.

On the flipside, they are prone to extreme volatility, pay little income and may often feel more like speculation. They also are prone to boom and bust cycles and we may be reaching the top of an already-extended bull cycle right now.

Coming from a private equity background, I have never been particularly compelled by the idea of investing the majority of my net worth into traditional financial assets:

  • Cash is the surest way to lose money. You have no protection against inflation and all fiat currencies have historically failed, sooner or later. Today, the printing presses of central banks all around the world are going wild and testing new monetary policies that could potentially lead to accelerating inflation down the line.
  • Bonds pay close to nothing when adjusted for inflation and taxes. In fact, in many parts of the world, interest rates have turned negative. Bonds also expose yourself to similar risks as cash.
  • Stocks may provide more favorable returns over time, but they represent small pieces of companies that are highly complex, you have no control over, pay little income, and feel more like a bet on price appreciation. This bet appears to be increasingly unattractive with historically high valuations in a late cycle economy with a long overdue recession.

I invest in cash, bonds and stocks – but they are unlikely to ever represent the majority of my net worth.

I much rather invest the backbone of my portfolio into real assets such as commercial properties, energy pipelines, farmland, timberland, windmills, and other tangible assets. Today, roughly 60% of my portfolio is allocated between these investments.

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The current investment environment favors real asset investments and institutions are taking note.

In less than 10 years, institutional capital in this space has grown by $30 trillion and another ~$50 trillion is expected in the decade ahead.

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Allocations to real assets were only 5% in 2000. Today, it's closer to 25%. And in 10 years, this figure is expected to exceed 40%:

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At High Yield Landlord, we are ahead of the crowd with the majority of our Core Portfolio already invested in high cash flowing real assets.

Why Favor Real Assets Over Stocks, Bonds and Cash?

Below we discuss the three key reasons why professional investors are rushing into real assets and how you can mimic these strategies with publicly-traded alternatives.

Reason #1 – The Only Yield Left

The 10-year treasury is down to a 1.7% yield and the S&P 500 (SPY) pays just 1.8%. With stocks and bonds paying close to nothing, especially when adjusted for inflation, yield-starved investors should take a closer look into various real asset classes.

To this day, you can buy real estate at a 6%-7% cap rate and finance half of it with a 3%-4% mortgage. That on its own results in a nearly 10% yield.

There are a lot of REITs (commercial real estate) and MLPs (energy pipelines) that trade at a ~10% cash flow yield – out of which they pay out a portion in dividends and reinvest the rest in future growth.

Our Core Portfolio is exclusively invested in real assets and we are able to target a nearly 8% dividend yield that's growing and backed by a conservative 72% payout ratio.

This income can be used to reinvest, live or save. With higher income coming in, investors also are less dependent on stock market appreciation which is much more uncertain.

Reason #2 - Higher Total Returns

Earlier, we mentioned the example of buying a property at a 6%-7% cap rate and financing half of it with a 3%-4% mortgage. That on its own results in a nearly 10% yield. Then when you add to that a few percentage points of growth, your total returns gets into the 12%-15% range.

This is not unrealistic. It is in fact done every day by experienced real asset investors. Over the past 30 years, the real asset pioneer Brookfield (BAM) earned a 16% annual return – compared to just 7% for the S&P 500 (SPY):

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Real assets generate high income, but they also appreciate in value and grow cash flow. A well-located office tower may yield 6% and grow in value by 3% per year. Add to that a bit of leverage and you can reasonably expect double-digit total returns even in 2019.

I'm much less certain about the return prospects for stocks which trade at historically high valuations in a late cycle economy.

Reason #3 – If Not Real Assets, What Else?

Everything is pricey. However, some assets trade at more reasonable valuations than others and also offer better downside protection in the event of a recession.

As explained earlier, investing in bonds, stocks and cash feels increasingly dangerous in a late cycle economy. Future returns do not look very compelling. At the same time, risks are on the rise worldwide.

Real assets offer diversification, inflation protection, superior income and resilience. No wonder that investors are rushing toward real asset investments.

The Rush to Real Assets Has Begun

Over the past 10 years, institutional capital in the real asset space has almost tripled. And another ~$50 trillion is expected in the decade ahead.

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Yes, that’s with a “T.” Up to $50 trillion is expected to shift into real asset investments over the coming decade. Investors have historically been overly exposed to traditional assets, including stocks and bonds, and it's quickly changing today.

We believe that you can profit from this rush to real assets. Institutional capital is expected to nearly double in just 10 years. It does not take a genius to realize that with more money chasing real assets than ever before, valuations are likely to be pushed higher.

Twenty years ago, we were buying office buildings at 8%-10% cap rates. Today, these same properties commonly change hands at 6-7% cap rates due to increased investor appetite. And in another 20 years, it's very plausible that similar buildings will trade at 5%-6% cap rates – leading to further appreciation to today’s investors.

In certain parts of Europe, the demand for real assets is so high that cap rates already have dropped below 3%. The US market still has a long way to go.

How can Individual Investors Profit from Real Assets?

OK, so real assets should be a vital part of your portfolio. How is the average do-it-yourself retirement investor supposed to put this into practice to profit from the rush to real assets?

Fortunately, you do not need to be a multi billion-dollar institution to invest in real assets. At High Yield Landlord, we specialize in liquid alternatives to gain exposure to high yielding real assets. Here are five examples in which we are investing today:

  • (1) Commercial Real Estate: There exists more than 200 REITs today with each investing in different property sectors. A few popular examples include Realty Income (O), Simon Property Group (SPG) and STAG Industrial (STAG).
  • (2) Airports and Railroads: Today, there exists many listed airport companies in which you can invest by simply buying their shares. Examples include Grupo Aeroportuario del Pacifico (PAC), Auckland International Airport (OTCPK:AUKNY), and Sydney Airport Ltd. (OTC:SYDDF).
  • (3) Timberland and Farmland: You can invest in both asset classes with listed partnerships and REITs such as Farmland Partners (FPI) and Weyerhaeuser (WY), among many others.
  • (4) Energy pipelines: Investors can get exposure to high-yielding energy pipelines through the purchase of MLP units. Popular examples include Energy Transfer (ET) and Magellan Midstream Partners (MMP).
  • (5) Windmills: Similarly, investors can invest in renewable energy assets through listed partnerships such as Brookfield Renewable Partners (BEP) and specialty REITs such as Hannon Armstrong (HASI).

Real Asset Risks

Now, while there is a lot to like about real asset investments, it should be clear that there also are risks involved.

Certain property sectors are negatively impacted by technology. As an example, malls are currently hit by a wave a store closures and the growth of Amazon (AMZN) is the primary cause. Similarly, hotel REITs may suffer from the growth of Airbnb (AIRB) and other online booking websites.

Pipelines are exposed to regularly hurdles, commodity prices and technological advancements in renewable energy. Airports tend to see lower traffic during recessions. Windmills see their value decline over time.

You have to be picky in what you invest, and most importantly, you must make sure to diversify across several real asset investments to mitigate risks and maximize returns. Below, we share some closing thoughts on our real asset portfolio.

Our Diversified Real Asset Portfolio

REITs and MLPs – along with several other real asset backed financial asset investments – are all high yielding assets that allow us to generate over $5,000 in annual passive income from a small $70,000 Real Asset Portfolio.

Source: High Yield Landlord Real Money Portfolio

We currently hold investments in the following real assets:

  • Real estate
  • Energy pipelines
  • Timberland
  • Farmland
  • Airports
  • Railroads
  • Windmills
  • Solar farms
  • Goldmines
  • Ships
  • And many others…

Compared to traditional equities, our real asset portfolio also enjoys much more reasonable valuation metrics trading at:

  • 9.5x cash flow on average.
  • 18% discount to estimated NAV.
  • 7.2% dividend yield (with safe 68% payout ratio).

With interest rates expected to remain lower for longer, and stocks trading at all-time highs, we believe that these attractive attributes will continue to attract more and more capital toward real assets. This will result in bidding up of prices, compressing yields, higher valuations, and strong total returns to investors who position themselves early enough.

Still, 20 years ago, most investors would ignore these assets. Today, they are becoming one of the biggest components of institutions’ portfolios:

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Disclosure: I am/we are long WY, BAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.