How a Leading Fiduciary Advisor Chooses Real Estate Investments for Clients 

Topic:  • By Origin Investments • October 12, 2022 Views

Matt Shibata is managing partner and chief compliance officer of Morling Financial Advisors (MFA), a San Francisco-based registered investment advisor. MFA began investing with Origin Investments in 2019 after searching for multifamily real estate investment managers and solutions.   

“Many of our clients have real estate exposure, but they often haven’t thought about investing through a fund structure. It makes a lot of sense for a portion of a client’s portfolio,” Matt says. As of September 2022, 90 MFA clients have invested a total of $20.5 million. Matt recently sat down with Origin Investments for a conversation about how investing in private real estate has benefited his clients and why he chose Origin as an investment partner.     

Origin: What do you look for when selecting investment recommendations for your clients?   

Matt Shibata: Put simply, we’re looking at a client’s needs and determining what is the optimal way to meet those needs. This is generally going to consist of publicly traded investments as well as private alternative investments.   

Practically, the first step is sourcing ideas and conducting due diligence on managers and funds with the goal of populating a menu of solid investments for our advisors to work with. The funds on that list might not be appropriate for every single client, but each vehicle will work for at least a handful of clients. The main thing is making sure that we understand those funds inside and out, trust the managers and align incentives as much as possible.   

The second step is understanding a client’s objectives and constraints, and recommending investments that help them meet their specific goals. There are some investments that we love but won’t recommend to certain clients based on risk tolerance, time horizon, tax situation and so on. So, we are looking for investments that will help our clients meet their goals, which will differ from client to client.   

How do you personally spot an investment opportunity?   

MS: I have learned that opportunities can come from anywhere, so I just try to be perceptive and keep an open mind. If we identify an attractive opportunity or asset class, we will do a formal search to find the strategies and vehicles that we believe represent the best ways to gain exposure. However, our network also provides a lot of ideas. Our clients often ask us to review funds that they have invested in or are considering. We have also invested with managers who were introduced to us by other advisory firms, so networking with other allocators has been very fruitful. Spotting an opportunity is sometimes more about sourcing and filtering through a lot of ideas than knowing exactly where to look based on some brilliant thesis.   

When selecting an alternative investment, what problems are you looking to solve for clients?   

MS: Alternative investments help us address several challenges in the public markets, specifically low expected returns, elevated volatility and high correlations. For instance, we began allocating to private real estate debt back in 2010 after the global financial crisis had driven rates down toward zero. Just a few years prior, we could generate more than 5% on cash and a bit more if we took on some modest duration or credit risk. By 2010, yields had declined to very low levels, but we still wanted to generate healthy yields for our clients.  

Many lenders had gone bust during the financial crisis, and legislation like Dodd-Frank made it more difficult and expensive for banks to lend. This shortage of capital and declining competition made real estate lending really attractive and allowed us to target much higher returns for our clients.   

We believe investors need to take risks to generate returns, but the volatility and prevailing valuation of public equities can make them unattractive for some investors. So, the question is whether we can generate returns similar to the public markets, but with less volatility or risk. All else being equal, we prefer lower volatility for two reasons.  

First, from a mathematical perspective, investment returns are geometric rather than arithmetic, and so a decline is more detrimental to returns than an equivalent percentage increase is beneficial. Second, behavioral studies have shown that the emotional pain stemming from losses exceeds the joy associated with gains, so it is logical that investors find it easier to stay the course with lower-volatility strategies. I don’t recall who first said it, but I agree that the best investment strategy is the one that you can stick with.   

Regarding diversification, one of the challenges in the public markets is that nearly all the assets are correlated. Investors can diversify across asset classes, sectors, industries, geographies and so on, but correlations are very high. Even highly rated investment-grade bonds have historically sold off during equity market selloffs and bear markets. Treasuries have historically provided diversification benefits when other risky assets are declining, but even that market broke down to an extent in March 2020. While there are some negatively correlated strategies and vehicles out there, we focus on finding uncorrelated strategies that are insulated from or can take advantage of public market volatility.   

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When selecting an alternative investment, what goals are you looking to achieve for your clients?   

MS: It really depends on the client, but the goals will generally include generating income, targeting appreciation or being more tax efficient. Our clients who are retired generally own more real estate debt and income-producing real estate. For clients with less need for liquidity, we will often layer in investments with higher risk and return profiles, such as opportunistic real estate, private equity or venture capital.   

Many of our clients are in the highest marginal tax brackets, which is above 50% (between federal and state taxes) here in California, and so we are looking at how to reduce the tax burden. There are quite a few levels of this. At the top level, there may be some simple solutions to avoid realizing capital gains, from improving donation practices to using exchange funds where low-basis stock can be exchanged tax-free for shares in a diversified stock portfolio. The next level is generating tax losses to reduce current-year tax liabilities.    

On the public equities, this may be accomplished by using direct indexing to harvest losses while still tracking an index. On the alternative front, this is typically accomplished with real estate equity, where the rental income is often more than offset by depreciation. Of course, there are many other tools and strategies available, from estate planning strategies to Opportunity Zone vehicles.   

What are your goals, and what are the biggest obstacles you face?   

MS: My goal is simple: do my best for our clients, which closely mirrors my firm’s mission to maximize our clients’ financial well-being. Our clients trust us with everything they have worked for and saved for, so I take my responsibility to them incredibly seriously and work hard to serve them well. I really enjoy my work and am grateful to our clients who allow me to do it day in and day out.   

The biggest obstacle is that every client is different, and what is best for one person may not be best for the next. It’s a lot of work to get to know clients, understand their situation and analyze everything to determine what is best for their unique situation. It would be much easier to put everyone in a model portfolio or make our alternative investment solutions more scalable, but we would lose the ability to make more granular, client-specific recommendations, and we would potentially introduce new fees and risks. So, we’re cognizant of the obstacles, but we also accept that providing highly personalized, bespoke investment recommendations is not easy.   

When you were considering investing with Origin Investments, what impressed you?    

MS: First, the thoughtful way the Funds are structured. Origin was one of the few companies of the many that had launched funds that actually had experience in development. We don’t want to invest with someone who is doing something for the first time. The other thing that really stood out to me was alignment in terms of the investments of the co-CEOs into the Funds as well. We like to see alignment, and it was material and meaningful to see it at Origin.   

What has your overall experience been working with Origin?   

MS: Our experience with the team at Origin has been positive. We are in regular communication with Vice President of Investor Relations Vince DeCrow, who is very responsive to any questions and service requests. I’ve met Co-CEO Michael Episcope at the Origin office during our due diligence process and spoken to him a few times since. The investor relations team has come out to meet with us in California several times, in addition to many Zoom meetings. Clients’ investment and tax reporting have been timely as well, which we appreciate.   

What did you expect from the experience of partnering with Origin, and what was the result?   

MS: One non-negotiable for any investment manager that we work with is transparency. We want to know what is happening under the hood and expect all our questions to be answered. Origin has been transparent with us from the beginning, including and most recently those uncertain times in March and April 2020. They’ve been upfront about any possible or proposed changes to strategies and funds, which has been appreciated as well.    

Conclusion   

Why partner with Origin Investments? For our many RIA clients, it’s about protecting and growing their clients’ wealth while offering relationship-based pricing and dedicated client support. To learn more about our Fund offerings and why we’re ranked globally in the top decile of private real estate investment funds by Preqin, visit our Advisors page.    

Please note: Morling Financial Advisors is not a client of, nor an investor in any Funds managed by, Origin Investments. No compensation has been paid by Origin or any of its affiliates to Morling Financial Advisors in connection with this article, and no material conflicts of interest exist between these parties. 

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