The Future of Equity Investment: Part One

For the best part of two years, through COVID in particular, investors found it almost impossible to lose money, regardless of the asset classes they were invested in, by Richard Lester

 
But that ‘rising tide’ subsided dramatically in 2022, and everyone expects the environment will continue to be challenging for investors for the next year or more. We’re entering into an era where growth will be increasingly hard to come by, and we will have to adapt to a lower growth environment.

How have investors been responding? They’ve been pulling their money out of equities, especially traditional actively managed funds, where performance has been poor and the long-term outlook remains unappealing. But where to put that cash has been a problem, as staying parked in cash for the next year 12-24 months simply isn’t an option. It’s unsurprising then, that investors are now asking themselves where future returns will come from and are already diversifying away from equities and are increasingly open to other asset classes and different investment approaches.

Of course, one of the most sought-after asset classes in a time of higher inflation and rising interest rates is real estate. Bricks and mortar has always been a great defensive play, offering a meaningful hedge against inflation while delivering income levels that are very attractive compared to other asset classes.

But real estate assets tend to be the preserve of the private market, snapped up by institutions, sovereign wealth funds and private equity real estate funds able to gain exposure through the direct purchase of assets.

Efforts to open up the commercial real estate market to retail investors through open-ended funds haven’t been that successful, largely because of the significant levels of retained cash required, in order for the fund managers to avoid becoming forced sellers of their property assets when liquidity is sought. These products just don’t work if investors cannot rely on liquidity being available when they choose to sell. Indeed, in recent years commercial real estate investors have been locked into open-ended funds when trying to sell their holding.

The difference with assets listed on a regulated public exchange is that there is a permanent two-way price quoted, and investors are able to buy and sell as they wish. The challenge for retail investors who want to own real estate investments therefore, is lack of access, and the lack of a two-way market.

It’s not surprising more investors are looking to diversify and embrace new ways to invest. Today they can access more information than ever before, and digitalisation has given them the ability to buy and sell a vast array of traditional and non-traditional assets that they simply never had access to before – not only commercial real estate, but also residential real estate, wine, fine art, watches, automobiles, the list goes on.

There’s an ever-expanding universe out there and investors can apply their own ‘pick-and-mix’ approach across the full investment spectrum to achieve a truly diversified portfolio. And this diversification of assets goes hand in hand with the diversification of investment style.

In 2022, after several months of chastening returns across all the traditional asset classes, investors are questioning whether they should persist with traditional – and expensive – investment vehicles, or become more self-reliant.

The investment horizon in ten years’ time is going to look astonishingly different from where we are today. Investors will have online access to an unprecedented number of asset classes, and they will

be able to actively trade those assets in different ways all at the same time. The future will deliver true investor autonomy.
 
We’ll look at fractionalisation in The Future of Equity Investment: Part Two.
 
Richard Lester is Senior Advisor at IPSX, the world’s first regulated stock exchange dedicated to IPOs and trading of commercial real estate.