Versus Capital is a partner that we utilize for private real estate and real asset investing on behalf of clients.
The Versus Capital Multi-Manger Real Estate Income Fund offers access to private real estate investments using a traditional mutual fund structure as opposed to a less-liquid limited partnership. The fund seeks current income derived from high-quality, income-producing commercial real estate. Real estate was the best performing asset class last year and Versus Capital reported that the fund returned 4.61 percent on the year. With commercial real estate the primary risks are a lack of demand or the oversupply of new product. While each geographic market is unique, on an aggregate national basis, Versus Capital believes that supply of new commercial real estate will remain in check for 2019 and 2020. Occupancy rates increased across the four key property types last year (office, multifamily, retail and industrial) and new supply that came on the market was absorbed quickly. For 2019 Versus Capital is projecting that the net operating income, which is the revenue from the properties minus expenses, should grow between 2-6 percent. This growth in income for 2019 should result in a return for 2019 that is attractive on a risk-adjusted basis.
The Versus Real Asset Fund is a mutual fund designed to provide access to private infrastructure, private farmland and private timberland. Private infrastructure are assets such as cell phone towers and toll roads. Private farmland is the leasing of agricultural land to grow various crops such as corn or soybeans. Lastly, private timberland is investment in tree farms. All these assets are long-lived, income-generating assets. For 2018 Versus Capital reported that the Real Asset Fund returned .61 percent. While not an exciting return in an absolute sense, in the context of the returns of other asset classes in 2018 it was one of only a few that even enjoyed a positive return. The outlook for real assets is favorable in that there is bipartisan support for infrastructure spending in the United States. Real Asset investing is in the early stages and has been compared to where commercial real estate investing was in the 1980s.
Earnings season for the fourth quarter of 2018 is just getting started with only 11 percent of the S&P 500 companies having reported so far. Of the financial companies within the S&P 500 about 30 percent have reported. There has been a common theme of good credit quality, tepid loan growth and weak capital market activity. Over the last week the S&P 500 has returned more than 2.5 percent which brings the return for 2019 to more than 6 percent. Bond yields have hardly budged this year with the yield on the 10-year U.S. Treasury moving from 2.6 percent to 2.7 percent.
Week in Review and Our Takeaways:
The Versus Capital Multi-Manger Real Estate Income Fund and The Versus Real Asset Fund are good sources of diversification for conventional portfolios comprised of debt and equity securities.