Sep 29, 2023
As a new fund manager, you have an increasingly complex job. Many of the individual assets within your portfolio may be invested in different states and across multiple regions and asset classes that need strategic management for optimization. You can find yourself managing risk through volatile equity markets affected by government policies or dealing with currency fluctuations between countries that may affect your international investors. Your success as a real estate fund manager requires forward-thinking strategies on how to balance long-term investments with near-term revenues while optimizing each asset’s performance relative to the others in your portfolio. In this article we will provide five ideas that can help you manage these daunting tasks in ways that may help you fulfill your potential as a manger.
The importance of regularly reviewing your investment portfolio cannot be overstated. One crucial aspect of managing your investments effectively is analyzing your asset allocations. Because private real estate is not a liquid asset, it will be difficult to adjust your portfolio allocations in real time. A real estate fund manager cannot trade in and out of positions on a daily basis like a stock or bond fund manager. As a consequence, once you’ve made an investment into a particular asset, that asset will affect the performance of your portfolio for an extended period of time. Therefore, it’s essential to take a deep dive into your current portfolio and understand how your current basket of assets are aligned to your future financial goals and appetite for risk. Over time, market movements can inadvertently reshape the performance profile of your assets, leading to situations that could potentially harm your efforts to provide a strong risk-adjusted return to your investors. Although you could “fire sale” problem assets, one of the primary strengths of private investment is the ability to ride out market turbulence. The primary practical way that a fund manager can optimize portfolio performance is by being willing and able to adjust its strategy rapidly, for example by acquiring new assets that have the potential to compensate for existing assets that are experiencing temporary dips in performance. Proactively adjusting your acquisition profiles is one way some managers attempt to prepare portfolios to withstand market fluctuations and match risk tolerance to evolving conditions.
When it comes to managing your fund vehicle, paying close attention to expense ratios and fees is paramount in maximizing returns to your investors, especially in today’s cost-conscious environment. It is not uncommon to find disparities in fees amongst similar funds, which may seem trivial at first, but over time, can have a significant impact on investors’ overall wealth accumulation. As experienced asset and fund investment managers, we believe it is important for managers to periodically review the fees associated with vendors and service providers that are contracted with their fund and consider switching to lower-cost providers if it aligns with their value proposition. Cutting expenses can allow for more net income at the portfolio level, and it also fosters a reputation of financial prudence that will likely build credibility with your investor base. When it comes to passive investing, a penny saved is a penny earned, and understanding the impact of fees on the ultimate returns you pass through to investors is the first step to making informed and educated managerial decisions.
We believe responsible investors should review their portfolio at least annually or when certain asset classes deviate significantly from original expectations with the help of their investment professionals. While that might be sufficient for an individual investor, we believe this is far too infrequent for an active fund manager. Most real estate investments produce asset-level financials on a monthly basis, which makes that an ideal frequency to assess performance. In certain cases, like a property that is actively under construction, it may make sense to check-in weekly, or even daily. This strategic and disciplined approach helps you identify developing risks early, develop mitigation plans, correct unwanted performance trends, and capitalize on market opportunities. Regular comparisons to original proforma underwriting assumptions, as well as annual budgets might be the crucial element that helps you stay on the path towards achieving your financial performance goals for your investment portfolio.
In today’s rapidly-evolving financial landscape, staying informed on market developments has become an indispensable ingredient for prudent investment decision-making. By closely monitoring economic news, policy changes, and industry trends, investment managers can gain invaluable insights needed to evaluate the potential risks and opportunities associated with their holdings. Understanding the implications of these market shifts facilitates data-driven assessments on new acquisition strategies, contributing to a resilient and well-adapted portfolio (see paragraph 1). Enhancing market knowledge not only equips managers with foresight but also serves as a long-term foundation for making calculated, strategic moves in a dynamic and uncertain economic climate. With the ever-increasing wealth of information available, leveraging that knowledge is imperative for the protection of your investments and the ultimate realization of your portfolio performance goals.
While navigating the ever-changing financial world, it is crucial for real estate fund managers to stay ahead of the game and make informed decisions to optimize their portfolio performance. One effective strategy is to consult and partner with other experienced fund managers who bring a wealth of knowledge, expertise, and insights to the table. These seasoned professionals have honed their skills over time and can provide valuable advice on navigating market volatility, identifying investment opportunities, and mitigating risks. By embracing the guidance of expert advisors, aspiring managers can elevate their strategies which could ultimately produce a stronger track record of results.
After thorough analysis, the first step towards optimizing portfolio performance as a new fund manager is to consider your go-forward acquisition strategies and adjust accordingly. Review the expenses and vendor fees associated with your investment vehicle, and make sure your cost structure is competitive. Secondly, it is imperative to keep on top of individual asset performance on a regular basis for effective portfolio management. It also pays off in the long-run to stay informed about recent market developments. And finally, partnering with experts can help inform more pragmatic choices when it comes to investment decisions. Ultimately, having a holistic overview of your investment portfolio makes it easier to work towards optimal capital growth and risk mitigation.
Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions.