If you’re an investor who loves volatility, 2020 has been a great year, as few asset classes have escaped the turbulence wrought by the Covid-19 pandemic. But who really likes seeing their equity gyrate wildly? At Aloha Capital, we’re proud to say that 2020 performance for the Aloha LTD Income Fund has been steady as she goes.
Let’s take a deeper look at the turbulence we’ve seen YTD in various investment sectors.
Real Estate Investment Trusts (REITs) have been a favorite with investors in recent years. REITs pool investors’ money to purchase real estate assets. REITs were supposed to be a safe place to put your money, even in an economic downturn, but 2020 has been a nightmare for many REIT investors. Over the last ten months, commercial real estate owners have experienced one of the most uncertain times in history. Many seemingly safe REITs saw their stocks plunge 50% or more as the market realized that thousands of businesses will close up shop and stop paying rent because of the COVID-19 pandemic. Hotels have been mostly empty, malls have been shut down, and hundreds of thousands of small businesses have closed their doors. These businesses are the ones that pay rent to property owners, spend on business trips and stay in hotels. They have unfortunately failed en masse, which in turn has had a devastating effect on the associated REITs.
As we write, the Vanguard REIT (VNQ) index is down 8.51% year-to-date. A bad return, but at one point in March, VNQ was down 39%. Not what we’d call a “sleep well at night” investment…
Meanwhile, we would point out that Aloha Fund has returned 5.87% year-to-date, with steady income payments every month. Not one of our investors was hit by crazy volatility, or by any draw-down of his or her capital account. And further: we can extrapolate these stats all the way back to the Fund’s January 2015 inception—almost six years ago. Aloha’s focus on diversified, quality residential real estate lending allowed us to weather the Covid-19 storm relatively unscathed. Yes, our returns have come down some in 2020 vs. prior years, but all things considered, the Fund has performed quite well.
In contrast, many other “safe” investment sectors have also shown extreme volatility in 2020, including bonds. High Yield Corporates were hit hard in March as the risk of default suddenly spiked, sending high-income bond prices tumbling. The iShares High Yld ETF was up 0.30% YTD through October 31, after being down nearly 12% at one point.
Foreign bonds also took a nosedive, as there was no hiding overseas from Covid impacts. The iShares Emerging Mkt ETF (EMB) has shown a total return of 1.14% YTD, but took a 15% nosedive in the spring.
Further in the Bond sector, T-bills have displayed minimal volatility in 2020. Which is great, and typical for the instrument, except that 1-3-month gov’t paper (BIL) has returned a minuscule 0.66% YTD.
How about placing some money in commodities, diversifying from stocks and bonds? That would have been a terrible idea in 2020, as the Invesco DB Commodity index (DBC) is down 18.59% through October. DBC was down nearly 35% at one point in March.
Commercial Property, as measured by the Commercial Property Index (CPPI), took a hit in April and has yet to rebound to pre-pandemic levels. Even before Covid-19 ravaged brick-and-mortar retail, that sector was in decline. The pandemic has driven a surge in commercial tenants facing bankruptcy.
Of course, the stock market has put in an amazing rebound since March, with the Fed at its back injecting another huge dose of liquidity. But let’s not forget that the S&P 500 imploded 33% in just 21 days before bottoming. Watching a third of your capital melt away in less than a month will shorten your life! Another key reason stocks have levitated to all-time highs is that the Fed has pushed interest rates to near zero. We understand the value of equities over the long term with the right approach and if one can withstand the volatility. With that said, the Fed’s uninhibited use of monetary stimulus to prop-up the stock market makes us a little nervous over the longer term.
When we launched the Aloha Fund in 2015, after almost two decades of working in the hedge fund and managed futures space, one of our top goals was to create a business where our investors’ capital wasn’t subject to the periodic 10% – 25% haircuts experienced in the stock market. Seeing one’s capital fluctuate wildly can be very stressful – for clients and ourselves. We built the Aloha Fund to generate steady returns & income from low volatility, passive exposure to residential real estate lending. And we wanted it to offer all of this while we sleep well at night. This approach, and the unique opportunity the Fund offers investors to gain exposure to one of the most resilient asset classes around has worked out well in 2020. We invite you to join us in 2021, as we have some exciting things on the horizon that we believe will make Aloha LTD Income Fund an even more distinguished investment offering.
Steve Sapourn is co-founder and portfolio manager at Aloha Capital. He specializes in designing low-risk portfolios that reliably out-perform benchmarks. Steve has managed alternative investments in a variety of asset classes for nearly 25 years. His accomplishments include creating and implementing quantitative trading strategies in the futures, stock, and volatility markets. He’s also served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies.