How COVID-19 Has Revealed the Non-Correlation and Lower Volatility of Alternatives

November 3, 2020

How COVID-19 Has Revealed the Non-Correlation and Lower Volatility of Alternatives

November 3, 2020 | James Sprow | Blue Vault

In a Blue Vault Webinar entitled “Why Wealth Advisors are Looking More Closely at Alternative Strategies During the Pandemic” broadcast on October 29, H. Michael Schwartz, Founder & Executive Chairman of SmartStop Self Storage REIT, Inc., and Brian Buehler, Partner at Triton Pacific, both pointed out the extreme volatility of listed stocks that invest in basically the same asset types as their alternative investment portfolios. Steve Stroker, CEO at Black Creek Capital Markets also shared his perspectives related to industrial assets that their Black Creek Industrial REIT IV, Inc. focuses on.

Michael Schwartz used the example of Extra Space Storage, Inc. (EXR).  SmartStop has a good relationship with Extra Space and he pointed out that on March 16 the company’s common traded at $79.72, down from $115.43 in February. Michael pointed out that there is no way that the self storage assets in the Extra Space portfolio had dropped 31% in value in the space of a month. Since March 16, the stock has rebounded to about the same price as its February peak. None of the market’s devaluation of EXR had anything to do with drops in rates or occupancies. Rather, it was strictly based upon the systematic discounting of listed values generally by a schizophrenic “Mister Market” as Warren Buffett would say.  When comparing alternative investments such as SmartStop Self Storage REIT, Inc. to traded REITs in the same basic business, the difference in volatility and correlation of values with the overall investment market is rather stark. (We would also point out that EXR currently has a forward dividend yield of 3.11% compared to SmartStop Self Storage REIT’s annualized distribution yield of 6.00% as of June 30, 2020). 

Brian Buehler is a Partner at Triton Pacific. Their private equity program, focused on quick serve restaurants (“QSRs”), has acquired a portfolio that includes a large number of Burger King franchises. He pointed out the same type of volatility in the fast food listed stocks. For example, in February 2020 Blue Vault observed McDonalds (MCD) common trading at over $217 per share.  By March 23 it reached a low of $137, down 37%. For an investor in listed stocks, that kind of volatility can be gut-wrenching. And Triton Pacific can point to the cash flows and distributions that their private equity offering is maintaining investing in QSR assets (7% annualized on their Class A stock) and the long-term prospects for gains in their portfolio value, without the volatility of their listed peer group. (Note also, MCD’s forward dividend yield is at 2.31%).

Blue Vault looked at an example of a listed REIT that invests in industrial assets and actually purchased a large portfolio from Black Creek Group in January 2020, providing liquidity for investors in their nontraded Industrial Income Trust, Inc.  Prologis, Inc. (PLD) traded at $99.23 on February 10, 2020. On March 16, 2020, it had fallen to $62.82 per share. That 37% drop in value mirrored the volatility of the listed REITs mentioned above. Meanwhile, the estimated net asset values per share, as provided by third-party appraisers, for Black Creek Industrial REIT IV, Inc. went from $10.0800 per share in Q4 2019 to $10.0591 per share in Q2 2020, in the midst of the pandemic, a drop of 0.2%. That REIT’s Class I shares were also distributing at the annualized rate of 5.42% compared to Prologis’ forward dividend yield of 2.38%.

Analysts know that real estate assets in the industrial, self-storage and fast food restaurant segments have been among the best performing and most resilient during the pandemic. The above examples make clear that listed REITs and alternatives investing in similar assets can behave quite differently in times of economic distress.

When alternative investment portfolios are appraised regularly by third-party appraisers, the changes in asset values rarely deviate from year-to-year by more than five percent. Compared to the volatility of listed stocks, the low correlations and low volatility of these alternative investments are a strong selling point for financial advisors and an attractive quality for investors looking for diversification and income.

Sources:  Blue Vault, Yahoo Finance

Go Back
Derek Hayes
Blue Vault's Services
April 14, 2016

BlueVault saves a lot of time and effort in obtaining good numbers for analysis and provides good insights to compare against my own.