Broker Check

This Month’s Newsletter

The Search for Yield: Chapter 2                                                                   Join our Monthly Newsletter     November 2019                                                                                              

Mark R. Hoffman

CEO, Principal

 

Last month, our partner Trip’s article focused on the search for yield.  Given today’s rate environment (lower rates for longer), where can you go to find high quality, income-producing investments?  High yield bonds?  That’s a crowded trade and there is always default risk.  Treasuries?  Low risk, but also low yield and low return.  Dividend-yielding stocks?  Also a popular trade and there is always the potential for a long-overdue market correction.  Where do you look?

At Lanier, we are constantly barraged by fund managers trying to sell us on their latest investment ideas.  Some are good ideas.  Most are ho-hum.  Very few are – in our opinion – solid income-producing investments (i.e., bond replacements) that provide potential for strong upside returns.  But they are out there.  You just have to look hard.   

As an example, we recently discovered one very intriguing strategy.  An experienced management team recently launched a series of alternative real estate funds.  Fund I completed fundraising and closed in October.  The Fund sold out in a month.  Fund II is planned to launch in early 2020.  The Fund is targeted to pay 8%/year yield on capital deployed with additional return expected at the end of the 4-6 year expected life of the fund.  How does it work?

The strategy will invest in the undersupplied, multi-family, affordable housing market. Their targeted segment of the market offers highly predictable returns with countertrend characteristics to the US economy.  The fund managers identify properties where prudent capital improvements can substantially improve the living conditions in the complex and justify an increase in rent from below-market levels to market levels.  How do they know they will be able to increase the rents?  70-80% of the Fund will be invested in Section 8 apartment buildings where the rent increases are subsidized by government programs and have no impact to the amount that the tenant pays.  And how do they know the increased subsidies will occur?  Because they negotiate the deals with HUD before they buy the properties.  Brilliant.  Low vacancies on the properties because of long waiting lists of renters that want to move in.  Low bad debt as HUD pays ~80% of the rent via a monthly wire to the owner.

 


Once the properties are purchased and the capital improvements have been made, they will be held for a year or two (season them) and then package them and sell them to a long list of strategic buyers:  REITs, insurance companies, pension funds, private equity funds, etc.  All of these potential buyers are eager to find stable cash-generating investments but don’t want to spend the time chasing $5 million deals that won’t move the needle.  But a $200 million deal will.  Brilliant.  

Are there downsides?  Sure.  Your investment is illiquid over the 4-6 year expected life of the fund.  Could the government eliminate subsidies?  Yes, but removing or reducing this benefit to working class America would be political suicide.  Could the real estate market fall apart just when they are trying to sell?  It could, but they have the flexibility to wait to sell and you are still getting paid 2%/quarter to wait!  And if the economy heads south and you own a property where HUD is paying 80% of the rent, won’t that be somewhat shielded from the downside?  We think it will.  

This strategy isn’t for everyone. And it is limited to sophisticated, accredited investors.  But we think it is truly interesting.  It’s a niche strategy, but one that could fit well in a bunch of portfolios (including mine!).  

Yield producing strategies do exist.  You just have to turn over a bunch of rocks before you find the good ones.

  

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.


October 2019: Given the Current Rate Environment, How Has the Search for Yield Changed?

September 2019: What is the State of your State?

August 2019: Volatility is back, but is it the end of the world?

July 2019: Is This the Year 2000 All Over Again?

June 2019: Concerns of an Economic Slowdown?

May 2019: Benefits of Hedge Fund Investing

April 2019: Yet Another Burden On The US Economy

March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

July 2017: Quality of Life Influencers (Cont'd)

June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

April 2017: Time to Invest in International Equities?  Let's Take a Look...

March 2017: Valuation - A History Lesson

February 2017: The Prince of Darkness

January 2017: Mountains of Debt - Does it Matter Anymore?

December 2016: Trumponomics: Reagonomics' Twin?

November 2016: Found Money

October 2016: Marrying Theory and Practice

September 2016: Do You Have a Sharpe Portfolio?

August 2016: Be Careful of High Dividend Stock Strategies

July 2016: "Die Younger" is Not a Strategy

June 2016: Blame Tina

May 2016: Would You Rather:  Tax Cut or Tax Increase?

April 2016: Father Time Demands Your Attention

March 2016: What Has the Last Year Taught Us?

February 2016: Winners and Losers of the Oil Battle

January 2016: Diversification Improves Returns and Lowers Risk

December 2015: Synergy and the Art of Building High Performance Portfolios

November 2015: Take Control...or the Government Will For You

October 2015: A Note from Our Dean of Business

September 2015: Double Espresso at Midnight

August 2015: An Allocation to Hedge Funds - Essential!

July 2015: Another Greek Tragedy?

June 2015: What Does Financial Planning Mean To You?

May 2015: The Active vs. Passive Battle

April 2015: Out on an Island – Preparing for the Fed Rate Hikes

March 2015: To Fee or Not to Fee?

February 2015: European Central Bank Tries QE – Will it Work?

January 2015: 2014 Recap