Offensive and Defensive Positioning
Stable Income & Principal Protection in a Dynamic Interest Rate Environment
The July 2017 Beige Book published by the Federal Reserve indicated economic activity continued to expand across all twelve Federal Reserve Districts. In addition, the majority of Districts expected modest to moderate gains in the months ahead. Unemployment was improving with hiring constrained by worker shortages, wages were increasing, and there was upward pressure on the cost of consumer goods. All considered good news for the economy. Nevertheless, the Fed voted to keep interest rates flat, with rates in their middle range and an eye toward reaching a 2% inflation target.
From the launch of quantitative easing through today, fixed income investors have faced the challenge of generating higher yields and strong cash flow in a persistently low interest rate environment. Absent other geopolitical or economic changes, rates may only remain low in the near term as continued economic strength may lead to rate increases exposing some bond holders to other challenges.
Increasingly, alternative investments have gained greater acceptance and utility in solutions-based portfolio strategies to address investor needs and concerns. The resulting proliferation of alternative investments has unfortunately cluttered the landscape. This has led investors and their advisors to focus more on the fund manager and the manager’s forward-looking philosophy and approach in an uncertain interest rate environment. Further, it has fueled the investor’s demand for more conservative, simple, transparent strategies with strong fundamentals and repeatable results because those strategies have a higher probability of weathering future challenges.
Private Real Estate Debt
As the manager of the WFP Income Fund, our investment philosophy of delivering Stable Income & Principal Protection is realized through a portfolio consisting of short-term first trust deeds and mortgages with lower loan-to-values secured by income producing real estate. The result is a private debt fund positioned as a short-term, fixed income alternative investment backed by a hard asset (real estate) that produces relatively high cash flow, has no correlation to the stock or bond markets, and has little to no sensitivity to interest rates.
From an offensive standpoint, a real estate debt fund can deliver monthly cash flow from the interest earnings on the underlying loan portfolio. Further, a real estate debt fund can deliver a larger risk-adjusted spread relative to many other short-term fixed income investments. Advisors, therefore, allocate to the WFP Income Fund alongside other 1 to 2-year fixed income investments because of the fund’s higher current income and monthly distributions.
From a defensive standpoint, there is nothing like the warm blanket of a protective equity cushion to provide down side risk protection in a dynamic interest rate environment. Because rising interest rates may indirectly have a negative impact on capitalization rates, property values may be adversely affected in a rising interest rate environment. Therefore, an investor may hold a stronger position investing in an unleveraged, real estate-secured, senior debt fund than real estate equity. Further, a diversified pool of strong performing, short term loans held to maturity results in a dynamic portfolio with the following additional benefits: internal liquidity, the ability to efficiently adjust the portfolio based on market changes, and no mark-to-market adjustments. In the case of the WFP Income Fund, that also includes the ability to deliver a more stable net asset value (NAV).
Therefore, the balance of higher returns coupled with down-side risk protection is where the discussion really begins among advisors and their clients in a dynamic interest rate environment. And, an actively managed debt fund should be part of that discussion.
About Wilshire Finance Partners
Wilshire Finance Partners is a leading real estate-based investment firm focused on delivering wealth building solutions through Stable Income & Principal Protection™. Managed by Wilshire, the WFP Income Fund is a short-term fixed income alternative investment that delivers monthly cash flow and downside risk protection. Since the fund’s inception, the net asset value (NAV) has remained stable and demonstrated no correlation to the securities markets and no sensitivity to changing interest rates.
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This article is not an offer to sell or the solicitation of an offer to purchase the securities of WFP Income Fund (the “Fund”). Investments are limited to accredited investors who receive the Fund’s Private Placement Memorandum and accompanying documents. Securities are offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). Neither the Securities Exchange Commission or any state agency has passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials. Past performance is not indicative of future results. Investing in this Fund involves substantial risk, including loss of investment, and is not suitable for all investors.