My Portfolio Strategy For 2022
Summary
- As we go into 2022, most stocks and bonds are priced at bubbly valuations despite significant uncertainty.
- Even then, most investors remain near fully invested in traditional stocks and bonds.
- My portfolio is unique in that I invest more than 50% of it into alternatives/real assets. I explain why and present some of my top holdings.
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Despite recent concerns of rising interest rates, the reality is that we remain in an ultra-low yield world, and even after several potential hikes in 2023, the real interest rates will still remain negative.
Inflation is running at 6.8%, but the 10-year Treasuries (IEF) yield only 1.5% and long-term corporate bonds (VCLT) are barely better at 3%. The spread is massive and the real rates of return are clearly negative.
If you thought that this was bad, just look at what's happening in Europe. There, even nominal interest rates are negative. I just had a bank inform me that they will start to charge me 0.4% per year to hold Euros going forward.
It then isn't surprising that everyone has turned to stocks to earn better returns. The issue here is that because everyone had the same idea at the same time, valuations have now risen to extraordinarily high levels, with the S&P 500 (SPY) trading at ~30x earnings, which is double its historic average.
At the same time...
- We have a raging pandemic and restrictions
- Global supply chain issues
- The threat of a world war if Russia attacks Ukraine
- The threat of a world war if China attacks Taiwan
- The highest inflation in 30-plus years
- Countries and companies are more leveraged than ever
- The risk of rising taxes
- And I pass on many other looming risks.
... Surely, this can't end well?
If that's what you have been wondering about, then you're not alone.
Where can you invest today to not just grow your wealth, but also protect it from these risks?
Many have turned to cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD).
Some favor real asset or real asset-heavy investments like REITs (VNQ) and MLPs (AMLP).
Others have turned to assets like fine arts and farmland via crowdfunding platforms like Masterworks and FarmTogether.
And then finally, some have gone a step further and began to invest in even more exotic assets like digital real estate in the Metaverse or digital art via NFTs.
There's no right or wrong approach here. We all have different return objectives, tolerance for risk, and other personal circumstances that drive our preference for one asset or another.
But there's one main takeaway from this:
These alternative asset classes are rapidly growing in popularity, and if you still haven't looked into them, you're missing out on opportunities to boost your portfolio's future returns and lower its risk via diversification.
Alternatives, in my mind, can be anything other than traditional stocks or bonds. I would include things like crypto, NFTs, crowdfunding, and real assets, whether they're private or publicly listed via REITs or MLPs.
The market for these alternative asset classes is actually far larger than the market for traditional financial assets, and the private equity giant, Brookfield (BAM), expects alternatives to represent 60%-plus of an investor's portfolio by 2030:
Source: Brookfield (BAM)
The reality is that portfolio allocations have already evolved significantly over the past few decades. Not long ago, most of us still invested up to 40% of our portfolio into bonds, and alternatives were mostly ignored. Today, bonds have been replaced by stocks, and now stocks and bonds are gradually being replaced and/or supplemented by alternatives because they offer:
- Higher return potential in an expensive market
- Higher yield in a yieldless world
- Inflation protection in a money-printing world
- Diversification benefits in a volatile market
This shift in portfolio allocations has massive implications for investors because it means that 10s of trillions of capital could shift to alternative asset classes over the coming decade.
Since these alternative assets are limited in supply (think farmland), but they're growing rapidly in demand, you don't have to be a genius to understand that their prices are likely to go up.
I think that this is a historic opportunity for investors and I have structured my portfolio to capitalize on the growing popularity of alternative assets.
For once, we have the opportunity to invest ahead of the major institutional investors who suffer many constraints that slow them down their adoption of alternatives. Most institutional investors are restricted by their investment mandates and those take time to evolve, giving us a window of opportunity to invest ahead of them while valuations remain still relatively attractive. The growing adoption of Bitcoin is a good example of how rising demand coupled with limited supply can impact prices:
But to be clear, I'm not big into crypto myself.
We all have a unique approach to investing in alternatives.
Personally, I mainly invest in defensive, income-producing real assets that are essential to our society. Great examples of that include:
Affordable apartment communities:
Source: Mid-America Apartment (MAA)
Service-oriented net lease properties, such as Taco Bell restaurants:
Source: National Retail Properties (NNN)
Windmills:
Source: Brookfield Renewable (BEP)
Farmland and timberland:
Source: Gladstone Land (LAND)
A passenger port terminal:
Source: Tallinna Sadam (TSMT)
I like these alternative investments because in a world of high stock market valuations, ultra-low bond yields, and unprecedented uncertainty, I expect them to deliver higher returns with lower risk over time.
Many of these assets still offer a defensive 5%-plus yield and a predictable path to 5%-plus annual growth, which combined together, should lead to a 10%-plus total return, without even accounting for any upside from multiple expansion. If you think that these assets will keep growing in popularity, then it is not a stretch to expect another 5%-10% from expanding valuations, bringing total returns to 15%-20%, annually.
Ultimately, I don't know any other asset class that offers better risk-to-reward and that's why I invest over half of my portfolio in these real assets:
Here, you may wonder: How can you invest in such assets?
Well, fortunately, it's today easier than ever to invest in alternatives.
There are some well-established and reputable platforms for assets like crypto. I'm thinking about Coinbase (COIN) as an example.
There are also some rapidly growing crowdfunding platforms for real assets.
And finally, there are plenty of REITs, MLPs, and other infrastructure companies that are publicly listed. I get most of my exposure through them because they give me exposure to alternatives/real assets with the added benefit of leverage, diversification, professional management, and liquidity.
Hard to beat that!
Moreover, because they enjoy significant economies of scale, and have better access to capital at a lower cost, they have historically generated higher returns than other private investors:
What Are Some Examples That I'm Buying?
In total, I own ~30 real asset / alternative investments, representing over 50% of my total portfolio.
A few examples in which I invested recently include:
- NorthWest Healthcare Properties (OTC:NWHUF) is a Canadian REIT that specializes in hospital and medical office building investments. It pays a 6% monthly dividend yield and we estimate that it has ~5-7% annual growth potential. Combined together, it should provide consistent double-digit annual total returns.
- EPR Properties (EPR) is a US REIT that specializes in experiential net lease properties like movie theaters, water parks, golf complexes and ski resorts. Right now, it's deeply discounted because of the pandemic, but as we move past it, we expect its valuation multiple to recover, unlocking 30%-50% upside to shareholders. While you wait, you earn a monthly-paid 6.5% dividend yield.
- Tallinna Sadam (TSM1T) is an Estonian REIT-like entity that owns the Port of Tallinn and all the valuable land surrounding it. The city of Tallinn is today experiencing rapid growth and we expect the company to sell its land in the coming 24 months, unlocking significant hidden value for shareholders. We expect at least 30% upside, but quite possibly a lot more, and while you wait, you earn a near 5% dividend yield.
By owning ~30 such investments, I'm able to earn market-beating returns all while diversifying risks. My Portfolio's average cash flow yield is just over 8%, out of which 5% is paid in dividends, and the remaining cash flow is reinvested in growth.
My real asset portfolio has generated 20% average annual returns since its inception, and as these alternative investments continue to grow in popularity, I expect these strong returns to continue in 2022 and beyond:
Source: Interactive Brokers
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This article was written by
Jussi Askola is the President of Leonberg Capital, a value-oriented investment boutique that consults hedge funds, family offices, and private equity firms on REIT investing. He has authored award-winning academic papers on REIT investing, has passed all three CFA exams, and has built relationships with many top REIT executives.
He is the leader of the investing group High Yield Landlord, where he shares his real-money REIT portfolio and transactions in real-time. Features of the group include: three portfolios (core, retirement, international), buy/sell alerts, and a chat room with direct access to Jussi and his team of analysts to ask questions. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of NNN; NWHUF; EPR; TSM1T; FARMTOGETHER either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (74)
Agree on EPR.. added recently as well.
On another note ... another SA RE contributor very recently floated some speculation that O might be lining up another huge acquisition in Europe.
Thoughts
Intresting,