VNQ - My Portfolio Allocation For 2024

2023-12-23 08:05:00 ET

Summary

• I have a unique portfolio allocation for 2024.
• It is very heavy on REITs, private equity, and alternatives.
• I explain why this allocation makes sense to me.

Lately, a lot of you have asked me to share my portfolio allocation for 2024, and I am happy to do that. But before I get into it, please keep in mind that what makes sense for me may not make sense for you.

We all have unique circumstances, views of the market, tolerance for risk, return objectives, liquidity requirements, etc.

I am still a relatively young millennial, I have a high tolerance for risk and a long time horizon, I come from a real estate background, and have experience working in private equity.

For these reasons, I invest very heavily in real estate (via REITs), private equity asset managers, alternative investments, and fixed income is only a minor part of my portfolio.

Below, I discuss each of these categories in detail and share some of my favorite investments for each of them:

Real Estate Investment Trusts: ~50%

Most of my real estate investments are today in REITs ( VNQ ), but it wasn't always that way. I used to work for a real estate investment firm that owned $100s of millions worth of assets, and so I would also buy properties myself.

But today, most of my capital is going towards REITs because they are offering a historic opportunity.

Over the past two years, their share prices have crashed even as their cash flows kept on rising, and as a result, they are today priced at their lowest valuations in a decade.

It is not uncommon to find REITs that trade at just 50 cents on the dollar, meaning that you get to buy real estate at a 50% discount.

Such large discounts are highly unusual. REITs typically trade at a small premium to their net asset values and that's how it should be given that they provide liquidity, diversification, and professional management.

So I don't think that this window of opportunity will last for long.

The last time REITs were this cheap, it was early into the pandemic, and they then doubled in value in the following year as they recovered:

Historically, whenever REITs were priced at discounts that exceeded 20%, they were highly rewarding in the following years:

The recent crash happened because the market overreacted to the surge in interest rates, but it failed to recognize that:

• The surge in interest rates will likely be short-lived. Most major banks are predicting significant rate cuts in 2024.
• Moreover, REIT balance sheets are strong with low debt and long maturities, reducing the impact even if interest rates remain high for years.
• And finally, rents keep rising at a rapid pace and REITs are also acquiring new properties with retained income to grow their cash flow.

Put simply, if a REIT has a 40% LTV and only 1/10 of that matures each year, this would mean that the rising interest rates only have a direct impact on 4% of the balance sheet each year. But at the same time, the rent hikes impact 100% of the balance sheet, and so even if the rent escalations are limited, they would more than makeup for the surge in interest rates in most cases.

I think that as interest rates return to lower levels in 2024, REITs will surge to new all-time highs, and so I am investing heavily in them because I want to make the most out of this opportunity.

To give you an example of a REIT that I like: BSR REIT ( BSRTF / HOM.U) owns affordable apartment communities in rapidly growing Texan markets, and it is today priced at an estimated 40% discount to its net asset value. Simply closing the gap to its NAV would unlock up to 70% upside potential, and while you wait, you earn a 5% dividend yield that's paid monthly. The cash flow yield is much higher at around 8%, but the REIT retains nearly half of that to buy back shares, creating value for patient shareholders.

Stocks: ~20%

My stocks are mainly businesses that I think I understand better than the market due to my unique background working in private equity.

For this reason, I invest heavily in private equity asset management businesses. These are companies like KKR & Co. Inc. ( KKR ) that earn fees for managing investments for others.

It can be a very profitable business if you can convince others to let you manage investments for them, as it essentially allows you to participate in their returns without having to invest any of the capital yourself.

It is a high-margin business that's highly scalable, and it results in consistent fee income. Blackstone ( BX ) is the biggest company in this space, and its shareholders have done very well over the long run:

But today, Blackstone is getting very big with $1 trillion of capital under management, so its future returns likely won't be nearly as high.

The key is to find "the next Blackstone" before it gets so big because that's how you can earn such exceptional returns.

And having worked in this field, I think that I am well positioned to identify what makes a strong company with rapid growth prospects.

I own several of them, but a good example is Patria Investments ( PAX ), which I have previously called the "Blackstone of Latin America."

Today, it is the leader in the region with just $30 billion of assets under management, and I predict that in a decade from now, it will manage closer to 10x as much. Despite offering very strong growth prospects, it is today priced at a low valuation and offers an ~8% forward dividend yield.

Alternatives: ~20%

Alternatives are private investments that could be very rewarding, but they also come with higher risk.

My alternative investments are mostly concentrated in two things:

Firstly, I have invested in a real estate development project in Tallinn, Estonia. I have lived in Estonia for a few years and know the market very well. I think that it is set to become the "Luxembourg of Northern Europe," where wealthy people and foreign entrepreneurs move to save on taxes and enjoy Europe's best business environment. It is today already the country with the most unicorns (Skype, Bolt, Wise, Pipedrive, etc.) per capita in the world, and it is still just getting started. Estonia started from scratch in the 90s when it regained its independence from the Soviet occupation, and in just 30 years of development, it has already become richer on a per capita basis than countries like Portugal or Greece. I think that the future is bright, and the right properties will gain significant value over the coming decade.

Secondly, I own a stake in a private company called FarmTogether. It is the leading crowdfunding platform for farmland investments. I think that every investor should own some farmland in their portfolio for the sake of diversification and inflation protection, but it is today very difficult for most investors to access this asset class. FarmTogether solves this issue. I have known its founder, Artem, for years, and I don't know any better solution to invest in farmland. They are still early in their growth phase, and I got to invest in the company when it was still a lot smaller.

Fixed Income: ~10%

My fixed-income investments are meant to serve as a pool of liquidity to buy more stocks, REITs, and other investments in case of a market crash.

Today, I own two types of fixed-income investments:

I own publicly listed baby bonds and preferred shares, typically backed by real asset-heavy companies. I am commonly able to earn a 7-8% yield from good companies with limited downside risk. A good example are the Series O preferred shares (GOODO) of Gladstone Commercial (GOOD), which currently offer an 8.3% dividend yield that's very well covered.

I also own some private short-term bridge loans that are backed by properties. They are riskier than your average bond investment and, naturally, they also come with much higher interest rates, often reaching 12%. But despite occasional defaults, my average annual return has been around 11%, and they provide a steady stream of income to buy more stocks when the market is volatile.

Closing Note

We are all different.

Investing 50% into REITs is probably too much for you, but it makes sense for me given my background, high tolerance for risk, and long investment horizon.

Similarly, just holding 10% in fixed income may not be enough for some of you who need safe income.

So take all of this with a grain of salt. This is meant to give you some ideas, but don't just copy my entire portfolio allocation.

For further details see: