Wealth front and Betterment are upsetting financial services by providing the masses with automated versions of sophisticated investment portfolio strategies. Though powerful tools, these robot-trading platforms lack the best-performing asset class of the past 20 years, direct investment real estate.
Taking advantage of powerful technology to deliver a rich user experience, it is easy to see how these two companies, in just a few short years, have raised $2.6 billion and more than $3 billion in assets under management, respectively. In the past, individual investors required a significant portfolio to attract attention – and personal attention – an asset management team ready to design an investment portfolio adapted to their specific needs.
Small investors who fell short often found themselves excluded from the portfolio management approach. Technology-enabled platforms have disrupted this space by allowing retail investors the opportunity to allocate funds to multiple asset classes and even rebalance portfolios in conjunction with the managed portfolio approach. What investors lack when they use these platforms is the possibility of adding direct real estate investments to the composition.
Modern portfolio theory is recommending a target range of 10-20% sustainable real estate assets for well-diversified portfolios.
If you invest in a traditional REIT, you buy shares of the owner and not the property, which, at best, is a derivative of direct real estate and correlates with equity markets. Historical results show that diversification into direct real estate investments is effective in posting above-market returns in both up and down-market cycles.
A notable example of these alpha scores is Harvard University's performance in FY2015 for its endowment of $37.6 billion. Harvard's real estate investments delivered the highest returns in its total portfolio last year at 19.4%. Specifically, the Direct Real Estate Investment Program delivered an even higher return of 35.5 percent.