Alitis Investment Update – June 2020
June 9, 2020: No doubt about it… it’s been a tough year for investments! Nevertheless, Alitis’ conservative stance and allocation to private investments has resulted in our various investment solutions holding up well during these adverse conditions. It has been a couple months since COVID-19 had its significant impact on the markets, so an update on Alitis’ investments is due. Generally speaking, the public stock and bond markets have bounced back quite nicely since their lows in late March, which has resulted in very solid returns for Alitis’ Investment pools:
|Weekly Funds (Class E Units)
|April to June 5
|Alitis Strategic Income Pool
|Alitis Income & Growth Pool
|Alitis Growth Pool
|Monthly Funds (Class E Units)
|April & May
Year-to-End of May
|Alitis Private Mortgage Fund
|Alitis Private REIT
|Alitis Private Real Estate LP
The following provides further information on the strategies that we employed, as well as, what we see as we look ahead:
Our fixed income strategy has been to add different types of alternative fixed income investments as a means to increase returns, enhancing the relatively low yields available on traditional fixed income. The events in March did not work out well for the leveraged long/short investments and hurt our fixed income strategy but since then, these strategies have recovered significantly as central banks around the world stepped in to calm the bond markets. Now as of June 5th, the Alitis Strategic Income Pool was positive for the year.
Looking ahead: We expect that central banks will continue to support bond liquidity which should be positive for most types of fixed income for the short to mid-term. As we look further ahead, we believe that continued low yields and the stabilization of the corporate/high yield side of the fixed income market will lessen the upside for fixed income. In this case, the Alitis Income & Growth Pool will likely shift from fixed income to stocks as the year progresses, as there will likely be more upside available in stocks.
A major aspect of our mortgage strategy is to shift between the private and public markets as the relative valuations change. Private mortgage investments generally have a stable net asset value price whereas public mortgage investment corporations (MICs) can trade at a premium or discount to net asset value. Through the end of 2019 and the beginning of 2020, we were reducing our public MIC exposure as values increased. After the market collapse, we once again become buyers as the expected public MIC return is greater than that of the comparable private mortgage investments.
Looking ahead: We still expect to see some higher returns on public mortgages as prices increase. This will help to counter the slightly lower returns we expect on private mortgages – as these investments have generally increased their reserves for loan losses, which effectively lower their yields. We anticipate seeing a positive return for the year.
Going into the market decline, Alitis’ equity strategy was quite conservative. The Alitis Income & Growth Pool held the minimum amount to stocks and the Alitis Growth Pool was only about 50% exposed to stocks. As such, the downside due to stocks was much less than the overall markets. Subsequently, stocks have recovered nicely with Alitis’ strategy doing rather well since the beginning of May.
Looking ahead: Although the stock markets have been great for the last few weeks, we expect to see volatility, likely for the remainder of the year. That being said, we expect to see more upside to stocks relative to bonds/cash and will slowly allocate more to stocks as the year progresses.
Most of the real estate holdings in our investment pools are private. With the private market essentially frozen (no transactions), there is uncertainty on the impact of COVID-19 to valuations. To be conservative, we had been adjusting our valuation metrics (increased vacancy expectations and capitalization rates) which has generally resulted in lower expected completed project valuations; however, these adjustments have been offset by construction progress which have increased the current fair market value of the properties. Thus, we have built in a valuation buffer for when the multi-residential apartment real estate market thaws. After the market declines, we added our first public real estate investments in many years as the valuations were rather compelling. So far, these additions have paid off nicely.
Looking ahead: Alitis almost exclusively invests in residential multi-family housing which is regarded as the safest category of real estate. initial reports indicate that the vast majority of tenants are paying their rent with collections >96% – a very good sign. As well, mortgage borrowing rates have dropped significantly which makes owning an apartment building more profitable. This means that the value of multi-family apartments could increase as they would be more profitable to operate. We continue to be active in our search for new investment opportunities.
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Thank you for taking the time to read this update and if you have further questions, please feel free to contact your adviser.
Alitis Investment Committee
Mitchell Prothman, Todd Blaseckie, Thomas Nowak, Kevin Kirkwood