The Indexing Features of Passively-Managed Funds Are Now Available in Private Real Estate

Advisors that are looking to enhance the diversification characteristics of client portfolios by allocating to alternative asset classes have historically steered clear of private real estate. Concerns they have had include illiquidity, high fees, and lack of transparency, which may have prevented many advisors from considering the asset class. 

Fortunately, things are changing because the indexing features investors enjoy with passively-managed fund are now available in a private real estate investment strategy, which we’ll discuss later. But first, let’s review some of the potential benefits of index investing.

The Growth of Index Investing

As you know, active portfolio managers use strategies and proprietary processes to manage a fund in seeking to achieve its investment objective and typically aims to outperform a benchmark. This is as opposed to a passively-managed fund that aims to track an index.

Few would dispute that the popularity of index investing among individual and institutional investors has risen. In fact, according to data in the Investment Company Institute's 2022 Fact Book, at the end of 2021, passive index funds surpassed actively managed funds in U.S. stock ownership for the first time.

 The growth of index funds is due primarily to these three meaningful investor features:

Potential for Lower Portfolio Risk

Some index funds can provide broad portfolio diversification by owning hundreds or even thousands of different stocks or bonds, which can help minimize portfolio risk.

Lower Fees

While index funds are professionally managed, they generally don’t incur added expenses often associated with research teams and analysts evaluating and selecting every individual portfolio holding.

Potential for Lower Taxes

Some index funds may incur higher capital gains if the tracked index reconstitutes frequently, but many other index funds may have fewer taxable capital gains distributions because the index reconstitutes infrequently.

Another contributing factor to the growth of index funds is from how indexing technology has evolved to fuel product innovations that give investors access to indices previously unavailable. As a result, fund managers can select among several popular indexing models to achieve their investment objectives, including:\

  • Full Replication - Typically used by managers who want to own every security in an index
  • Sampling Optimization - Often used by managers who find it too difficult to own every security in the index
  • Synthetic Replication - A sophisticated approach of indexing that uses derivatives to own the underlying index securities

Indexing Comes to Private Real Estate

These advancements in indexing technology have made it possible for investors to access private real estate and an opportunity to experience many of the potential benefits of publicly-traded index funds.

Using data-driven, proprietary patented technology, IDR Investment Management (IDR) created the world’s first private real estate index fund. IDR Investment Management (IDR) is a subsidiary of USAA Real Estate Company and a registered investment advisor with $4.3 billion in AUM. IDR has been managing its private real estate index strategy since 2018 with clients that include some of the world's largest, most sophisticated investors. 

IDR designed the IDR Core Property Index Fund LTD to track the NFI-ODCE X (pronounced odyssey) Index, an industry benchmark that tracks the performance of a select group of premier investment management firms that own and manage diversified portfolios of institutional-quality core real estate throughout the United States. Similar to how the S&P 500 Index measures the composite performance of the 500 largest publicly traded stocks, NFI-ODCE X has been widely used by institutional investors since 1978 as the benchmark for private real estate investment performance.

The NFI-ODCE is currently comprised of twenty-five component funds (the "Component Funds"). These Component Funds are generally defined as funds which purchase the four main property types (office, retail, apartments and industrial) in the U.S.

The Manager has an agreement with NCREIF to also provide the NFI-ODCE X Index as a secondary index which tracks only "Eligible Component Funds" (i.e., only those Component Funds that are not considered "group trusts" such as U.S. public and private pension plans and IRAs). The NFI-ODCE X Index is designed to provide investors that are not able to access all Component Funds in the NFI-ODCE Index a more accurate index to benchmark their core holdings. Note: Indexes are unmanaged and unlike funds do not carry fees, charges, expenses or taxes. It is not possible to invest directly in an index. 

Removing the Obstacles

Equally important to the achievement of creating a fund that tracks one of the industry’s leading benchmarks, IDR was able to overcome many of the common objections to private real estate investing. Compared to traditional private real estate investment structures, the IDR Core Property Index Fund LTD aims to offer the following:

  • A lower fee structure 
  • Greater liquidity
  • Improved transparency
  • Simplified electronic subscription process
  • 1099 taxation
  • Broad diversification

Contact us at 833.768.0622 or by email at ODCE@usrealco.com and discover how simple it is to now provide your clients with access to a broadly diversified portfolio of institutional-quality private real estate.

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Important Disclosures:

Past performance is no guarantee of future results.

The information contained in this Presentation is for informational purposes only and is not an offer to sell, or a solicitation of an offer to buy, an interest (“Interest”) in a fund or other investment vehicle (collectively as applicable, a "Fund") by IDR Investment Management, LLC, (“IDR IM”) or their affiliates and subsidiaries. 

The information contained herein is subject to change, and may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IDR-IM.

Statements contained herein are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of the Firm. Such statements involve known and unknown risks, uncertainties and other factors, and you should not place undue reliance on them. Additionally, “forward-looking statements” may be referenced. Actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements.

Certain economic and market information has been obtained from published sources prepared by third parties and in certain cases has not been updated through the date of the Presentation. Neither IDR-IM nor their respective affiliates nor any of their respective employees or agents assumes any responsibility for the accuracy or completeness of such information. The IDR Entities have not made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties), and they expressly disclaim any responsibility or liability for this information. IDR-IM and the IDR Entities do not have any responsibility to update or correct any of the information provided herein.

The IDR Core Property Index Fund LTD is a registered closed-end non-diversified fund. The Fund's investment objective is to employ an indexing investment approach designed to seek to track the NFI-ODCE X Index on a net-of-fee basis while minimizing tracking error. Shares will be offered only to eligible investors as a private placement. Each investor seeking to acquire Shares must also be an "accredited investor", as defined in Regulation D promulgated under the Securities Act.

Investment in the Fund involves a high degree of risk including significant or complete loss of the principal amount invested and, therefore, is suitable only for sophisticated investors for whom such an investment is not a complete investment program and who are capable of evaluating the risks of the Fund and bearing the risks it represents.

The Fund is classified as "non-diversified" under the 1940 Act. As a result, the Fund can invest a greater portion of its assets in obligations of a single issuer than a "diversified" fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence. The Fund's focus makes it vulnerable to a downturn in the real estate sector. Real estate assets may be adversely affected by a number of factors including general economic conditions and changes in interest rates; regional and local real estate conditions; the supply of and demand for properties; changes in tax laws and legislation.

The shares are not currently listed on any securities exchange. Investors will have limited rights to redeem capital from the Fund and should not expect to be able to sell their shares promptly or at the desired price. Investors must be prepared to bear the financial risks of an investment in shares of the Fund for an indefinite period of time. Please refer to the Share Repurchase Program and Redemption section of the Private Place Memorandum. 

The Fund's allocation of assets between Eligible Component Funds may not produce the desired index-tracking returns and it may be unable to invest in in exact correlation with the NFI-ODCE X Index. Unexpected fees or expenses could also result in material deviations between the respective performance of the NFI-ODCE X Index and the Fund which could cause the Fund’s performance to fall below that of the Index. 

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