With yesterdays' publication of Fundrise’s 2022 year-end letter to investors, CEO Ben Miller is once again joined by Kendall Davis, Head of Investor Relations and Investor Operations, for an in-depth analysis and conversation about the Fundrise portfolio’s 2022 performance.

A valuable and insightful addendum to the Letter’s report of Fundrise’s 2022 performance, this episode is indispensable to any listener interested in better contextualization of and perspective on our portfolio and its outlook, whether that’s understanding how we so handily outperformed public market analogues; how we adjusted our strategy and fortified our portfolio over the past several years in anticipation of the sweeping 2022 market downturn; and why, looking ahead, we’re in a position of enviable investing strength, as we’ve prepared to take advantage of this next stage of the market cycle.

Some of the topics Kendall brings to the conversation for Ben’s consideration include:

  • How to understand the factors that impact year-end NAV and why NAVs are down, particularly in the Flagship Fund, even as the overall platform continues to outperform public market benchmarks by 15% to 20%.
  • Why defensive positioning, involving low debt and high liquidity, is so important today, and why we’re set up for potentially once-in-a-cycle investment opportunities in the months and years ahead.
  • Why the Fundrise Income Fund specifically outperformed peers, and why our avoidance of leverage made such a big difference.
  • What signals like an inverted yield curve tell us about what to expect ahead and where we are in the market cycle.
  • How we stay true to fundamentals in order to get timing right for our strategies in 2023 and beyond.
  • How we compare ourselves to Vanguard’s real estate fund, and how that fund’s exposure to hotels and retail puts it in a risky position.
  • What an optimistic Ben Miller – whose staunch market realism sometimes sounds like pessimism – looks and sounds like. (Listen until the end of the episode to find out.)
  • And much more, all covered in Ben and Kendall’s conversation.

Finally, for an even deeper look at market cycles, see our analysis below.

Join us for this latest episode of Onward anywhere that you listen to podcasts.

The Patterns of the Economic Cycle

cy·cle
/ˈsīkəl/
a series of events that are regularly repeated in the same order

There are typically two big phases of a downturn.

In the first phase, investors become wary, and start to demand greater returns to compensate for greater perceived risk, typically reflected by sundry financial metrics, such as multiples, discount rates, leverage ratios, spreads, risk premiums, etc. If the Fed is raising base rates, all the worse. Money becomes more expensive.

The country has just about made its way through the first phase, and in fact many of these financial measures are now improving. However, fear and trepidation in the financial economy already restrained capital investment into real economic activity, precipitating the next set of cascading events.

As capital becomes scarcer, companies and individuals start to cut back on expenditures. Businesses reduce their workforce. Corporate budgets are slashed. Consumers spend less. The effects waterfall through the economy — cut expenses are someone else’s cut income.

As more and more people and organizations tighten their belts, economic activity slows, and the real economy hits the skids. A vicious cycle ensues, and the country enters a recession.

The value of an asset is its future income stream multiplied by a risk-adjusted growth rate (RAGR). Every sector has its own financial vocabulary for it, but it all boils down to some measure of risk, adjusted by an expected growth rate.

In phase one of the downturn all these financial metrics degrade, making capital more costly for takers and rewarding for investors.

But that is only half of the equation. In the second phase, income streams and growth rates also deteriorate. Less economic activity means less income.

This is why fortunes are made by buying at the bottom. If company growth rate is depressed and multiples compressed, it is double whammy to valuation. Investing in businesses that rebound can create great outcomes when growth and multiples recover.

Resilient in a downturn

Not every sector sees their economic fortunes fall in a downturn. Resilient assets are called value investments. Consumer staples, like eggs, grocery stores, and other basic necessities tend to hold durable value during recessions.

Rental housing is another such example: in addition to the obvious characteristic that housing is essential to living, many consumers will actually spend more on it when the economy is difficult. Just as consumers will stay home and cook for themselves (i.e., buy groceries) instead of going to a restaurant, during a downturn fewer people buy new homes and will instead opt to rent.

Therefore, we expect the Fundrise portfolio to perform well in this next phase of the cycle. Moreover, unemployment remains low, surprising virtually every economist nationwide, which should mean more good things for rental residential.

To round out this analysis, one can then see why growth investments on the other hand get so hammered in these tough times. Few growth investments can maintain the high growth expectations formed during the top of the market. Economic headwinds inevitably slow their progress.

To reprise how we concluded the 2022 year-end letter, every investor has heard the plethora of famous sayings around timing the market — “buy low, sell high,” “buy when there is blood in the streets,” or “be fearful when others are greedy, and greedy when others are fearful” — most of which focus on the emotional challenge of acting in a contrarian manner.

However, merely having the ability to act is arguably just as important as having the insight or courage to act. This means being in a position to invest when the timing is right, which has more to do with the equally contrarian activity of building up liquidity when times are good.

So it is not an exaggeration to say that we’d been preparing for a year like 2022 for more than a decade. As we look ahead now to 2023, we see perhaps the best opportunity yet to validate our core mission and give our investors, who we believe hold a similar temperament and long-term outlook, the opportunity to capitalize on the over-leverage and short-sightedness of too many in the financial markets.