Preparing for the Changing Market Ahead
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The stock market has certainly had a good run the past decade, but every investor knows the good times can’t last forever. Determining how to both take advantage of ongoing market gains, while protecting against the risk of a downturn can be tricky business.
Even as the stock market has maintained its positive momentum, with the S&P 500 still up double-digits in the past 52 weeks, it’s hit pockets of volatility that’s had investors on edge. Lately, stocks have proven they can retreat quickly on even a hint of negative news, from geopolitical tension to jobs reports. Even the threat of the coronavirus spreading had stocks in a tailspin.
Fortunately, income investors have several strategies they can use to hedge against market declines and protect their principal.
If you’re relying on steady returns from your assets, developing a good defense against market volatility is especially important.
The Value of Diversification
Diversifying your portfolio, or spreading out your investments into a variety of assets, is one of the best ways to help protect against volatility. The key to diversifying well is to balance risk and reward by including a mixture of assets that respond differently to economic events. That way, you minimize your exposure to any one risk, and your portfolio is less vulnerable to downturns.
Of course, diversification doesn’t guarantee that you won’t suffer a loss, but it does significantly help reduce the risk of loss. For example, an investor who holds only small technology stocks would be more vulnerable to losses if technology sector took a hit than an investor who balanced those holdings with, say, blue chip stocks and commodities. An investor who’s more diversified endure the market turmoil much better.
Each investor will have a different ideal diversification strategy based on their financial goals and risk tolerance, but everyone should strive for some form of diversification in their assets.
One way to further leverage the power of diversity is by turning to alternative investments outside of the stock market and bond market. That way, when the stock market suffers declines or if interest rates falter, your portfolio will have assets that are not correlated to those trends. You’ll be better able to protect your principal and maintain your income.
Real estate investment funds are one example of alternative investments that can provide a foundation of stability during a changing market.
Private Debt Funds Vs. Traditional REITs and Bonds
Real Estate Investment Trusts, or REITs, are a key component in modern commercial real estate investing. With traditional REITs, an investor generally holds a stake in a specific piece of real estate, whether it’s in that property directly or through a mortgage secured by the property. Here the focus is typically on the income generated from the commercial real estate, as well as the appreciation of the value of the property, although REITs come in many shapes and sizes.
Publicly traded REITs trade like a stock on the stock market exchanges open to everyone. Private REITs, are not directly subject to stock market volatility.
Private debt funds, like the ones operated by Wilshire Finance Partners, operate in a different way. Capital raised from investors is used for lending, such as loans for the purchase or refinance of commercial real estate. As a result, the returns are more bond-like in that they provide more predictable income generated by the interest earnings on the underlying loans in the fund’s portfolio.
However, unlike publicly traded REITs and exchange traded stocks and bonds, some of the benefits of private debt funds include the elimination of market risk and the reduction or elimination of interest rate risk.
With respect to market risk, many investors have experienced volatility in the price of their investments that is unrelated to the underlying fundamentals of the investment itself. For example, an unfounded rumor may cause the market or an individual security to reactive negatively even though the fundamental strength of the underlying investment did not change. Unlike publicly traded REITs and exchange-traded stocks and bonds, private debt funds are not subject to that type of market risk because they are not traded on exchanges.
The price of exchange-traded bonds is also tied to, among other things, the broader key interest rates set by the Fed. There is an inverse relationship between interest rates and bond prices. As interest rates decrease, the price of outstanding bonds with higher coupons will rise. Conversely, when interest rates increase, the price of outstanding bonds with lower coupons will fall.
One of the beauties of certain private debt funds is that they have little to no sensitivity to interest rates. That is because the loans in the portfolios of many of these funds are short term and are held to maturity. As such, they are not subject to the same mark-to-market adjustments as an exchange-traded security or loans held for sale. Therefore, because these funds do not have the same market risk as a stock or bond, and have little to no sensitivity to interest rates, they are able to maintain a more stable net asset value (NAV). Ultimately, that may result in greater down-side risk protection for their investors.
Wilshire Finance Partners’ Alternative Investment Choices
With that in mind, Wilshire Finance Partners has developed innovative fixed-income investment solutions that offer short-term alternatives to stocks, bonds and public REITs, providing another way to diversify your holdings.
Through its two private estate-based debt funds, Wilshire Finance Partners provides both an offensive strategy to deliver consistent cash flow, as well as a defensive strategy that can help you hedge against market volatility.
Each real estate investment fund carries a different risk-reward strategy, but both offer a balance of greater stability and stronger returns. The WFP Income Fund and WFP Opportunity Fund each prioritize principal protection while seeking higher fixed income returns for their investors through the earnings on the loans in their portfolios. Launched in 2013, the WFP Income Fund has delivered an average net annualized return between 6% to 8%, and WFP Opportunity Fund has delivered an average net annualized return between 10% and 12%, although the WFP Opportunity Fund takes on a bit more risk to seek a greater return.
The way it works is simple and straightforward. The funds take advantage of bridge loans originated by Wilshire Finance Partners, which are secured by multifamily and commercial real estate. They’re pooled into one of the private debt funds managed by Wilshire. Investments in the funds are available to accredited investors through a private placement.
These funds offer principal protection through the underlying real estate assets, which are pledged as collateral for the loans. The loans are made with lower loan-to-values, which results in a protective equity cushion to help safeguard the investor’s principal investment. If property values increase, there is greater protection for the investors. However, if property values decrease, the protective equity cushion obtained through lower loan-to-values acts as a buffer to help protect the investor’s principal. Further, because these funds hold a number of loans in their portfolios, investors get the added diversification – they’re not investing in only one loan.
This unique combination of down-side risk protection and returns is rare among today’s investment opportunities in that it allows for shorter-term investing and more stable income with an alternative investment backed by a hard asset - real estate. And unlike traditional REITs, these funds do not have long lock-in provisions and no loads or commissions.
How Wilshire’s Funds Offer Key Advantages
Even the most secure investments do carry some risk. As a result, most modern portfolio allocation strategies will include, among other attributes, the ability to convert assets to cash when necessary. For example, if an investment begins to underperform, it’s important to be able to exit your position swiftly, so you can move your funds to another position.
Traditional non-traded REITs may have 5- to 10-year lock-in provisions. As mentioned above, publicly traded REITs are exposed to market risk and greater interest rate risk. In contrast, the WFP Income Fund has a 1-year lock-in provision and the WFP Opportunity Fund has a 2-year lock-in provision, with the ability to redeem in part or in full after the expiration of those periods. However, both funds also contain provisions that allow for the acceleration of redemptions in the case of hardship, notwithstanding those lock-in periods. The bottom line is that the funds managed by Wilshire Finance Partners include provisions that provide investors with greater access to cash as compared to non-traded REITs and other alternative investments.
Further, because each fund is an evergreen fund that invests in marketable short-term real estate loans with staggered maturities, the funds themselves have inherent internal liquidity to meet redemption requests. As loans are repaid, cash is available to meet redemption requests. Loans may also be sold to meet redemption requests. Conversely, if loans payoff and there are no pending redemption requests, that cash may be reinvested into new loans – thus the evergreen nature of the funds.
Therefore, although Wilshire’s funds are not cash equivalents, they are structured to provide greater liquidity and access to cash as compared to many non-traded REITS and other real estate-based investments.
When the attributes of Wilshire’s funds are compared to other short-term fixed income investments, Wilshire has designed its funds to seek the balance between Stable Income and Principal Protection sought by many investors.
Wilshire Finance Partners, Inc. specializes in real estate finance and investments and is the manager of the WFP Income Fund, LLC (the “Income Fund”) and the WFP Opportunity Fund, LLC (the “Opportunity Fund” and collectively with the Income Fund, the “Funds”). This communication is not an offer to sell or the solicitation of offers to purchase the securities of either of the Funds or otherwise. The purpose of this communication is to provide an overview of the respective Funds and their private placement. Persons interested in learning about either of the Funds and their private placement will be provided with a Private Placement Memorandum (inclusive of exhibits thereto and any supplements, the “Memorandum”), which provides a description of the respective Fund, the terms of its private placement, a discussion of risk factors, a copy of such Fund’s limited liability company operating agreement, a subscription agreement and other information related to the respective Fund. This communication contains certain forward-looking statements regarding each of the Funds’ investment objectives and strategies. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire Finance Partners, as the manager of the Funds. Although Wilshire Finance Partners believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire Finance Partners, any placement agent, or any other person, that the objectives and strategies of the respective Funds will be achieved. An investment in either of the Funds may be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. Each of the Funds securities are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act. Neither the Securities Exchange Commission nor any state agency has passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials. The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the securities. Past performance is not indicative of future results. Investing in the Funds involves substantial risk, including loss of investment, and is not suitable for all investors.