A Superior Alternative?

At Bow River we understand that investors have numerous options to consider as they ask What should I invest in? There is of course no easy answer to this question; investment decisions will be dependent on individual circumstances and risk tolerance. But we would like to highlight the long term (since 2000) performance of the S&P 500 versus the “Alternative” asset classes of Private Equity and Real Estate.

Source: Preqin Data, Bow River Format

Source: Preqin Data, Bow River Format

* The Private Equity Index aggregates performance information across all private equity strategies including private equity buyout, venture capital, private equity real estate, fund of funds and distressed private equity, and is calculated on a quarterly basis using data from Preqin’s Performance Analyst database. The models use quarterly cash flow transactions and NAVs reported for over 3,900 individual U.S private equity partnerships collectively worth more than $2.7 trillion of AUM. Bow River acknowledges that Preqin’s Private Equity Index does not include the entire universe of private equity funds or that private equity advisers are under no obligation to submit performance to Preqin. 

** The Preqin Real Estate Index is calculated on a quarterly basis using data from Real Estate Online. The models use quarterly cash flow transactions and NAVs reported for over 1,000 individual real estate private equity partnerships. Bow River acknowledges that Real Estate Online Index does not include the entire universe of real estate funds or that real estate advisers are under no obligation to submit performance to Real Estate Online.

*** The S&P 500 Total Return Index is a widely used index. The index includes 500 leading companies and captures more than three quarters of the total market capitalization. It is float-adjusted and based on the market cap weightings of the securities that comprise the index.

In the last 15 years, Alternative asset classes have outperformed stocks. Based on the data presented it would suggest that a dollar invested in Private Equity at the beginning of 2000 would be worth $3.15 as of June 30th 2015; that same dollar would be worth $3.11 had it been invested in Real Estate. An S&P 500 investment would be worth only $2.08.

Asset Class Returns

Source: Preqin Data, Bow River Format

It is not surprising that Alternative Investments have been growing in popularity. A June 2015 report from McKinsey & Company (HERE) highlighted that global alternative assets under management grew at a compound annual growth rate of 10.7% between 2005 and 2013. In contrast, stock-bond investment assets grew at about half this rate (5.4%) over that period.

Bow River would point out that the annualized returns of the S&P 500 were superior on a gross basis to both Private Equity and Real Estate between January 2011 and June 2015. However, we believe that this comparison would tilt more to the favor of Private Equity and Real Estate if the data was carried forward to the present day as the S&P 500 has declined over 7% since June 30, 2015. During this period the public markets have been more volatile (as measured by standard deviation of return) than Alternatives. Therefore, we believe risk-adjusting investment returns via a metric such as the Sharpe Ratio is useful.

Risk Adjusted Return Comparison

Source: Preqin Data, Bow River Format

*Standard deviations annualized from quarterly reports

**Sharpe Ratio calculated as excess return (annual return – 10 year treasury proxy of 2%) divided by the annualized standard deviation over the same period.

Sharpe ratios for Alternatives have been higher (lower volatility, implying less risk over the holding period) than for the S&P 500 since 2000 and 2011.

A link to the Preqin Private Equity and Real Estate Index can be found HERE.

 

Endnotes:

The information contained in this summary is provided for informational purposes only and contains confidential and proprietary information which is subject to change without notice. Any opinions expressed are current only as of the time made and are subject to change without notice.  This discussion may include estimates, projections or other forward looking statements. Due to numerous other factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases.

 It should be noted that private capital fund returns are not directly comparable with public market indices due to the illiquid nature of these alternative asset classes and the irregular timing of cash flows.

While we believe this information to be reliable, Bow River bears no responsibility whatsoever for any errors or omissions. Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, caution must be used in inferring that these results are indicative of the future performance of any strategy. Moreover, the information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation.  Any investment advice provided by Bow River is to its Funds with investment objectives and not to any one specific investor.

 The information and opinions provided in this report are as of the date of the report and Bow River is under no obligation to update the information or communicate that any updates have been made.

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