The Importance of a Track Record

February 21, 2017 - 5 minutes read

When I wanted to learn how to fly airplanes, I didn’t go down to the local airport to find a flight instructor.  When I was aiming to become a national-class figure skater, I didn’t pick an instructor from the wall hangings.  In both those instances, I selected the best in the field for their specialty.  I would expect you to do the same with your commercial multifamily investments and your selection of an asset manager.  The importance of track record, therefore takes a front seat as you begin to evaluate who to work with.

Various investment vehicles

There are various methods of placing dollars in large apartment investments.  Generally speaking, there are publicly available options.  There also are private options.  There are options for the “every man” and options for accredited investors.

As you examine these options and begin to match these options to your investment philosophy and investment strategy, some options will naturally fall by the wayside.  It is with the options that remain that some further analysis must be accomplished.

Education

Before tackling track record, a more basic question is in order.

If your asset manager is a trial and error asset manager versus a formally educated manager, has their learning been consolidated via track record or are they still on the learning curve?  There is an important distinction to make here as misinterpretation could result in poor returns for your investment portfolio.

Partners

Next, your assessment of the connectivity between your asset manager and other commercial real estate sponsors in the overall landscape of sponsors can offer some clues as to how successful your asset manager will be.

An asset manager that has a well-developed team of property managers, attorneys, title professionals, accountants, etc. that are utilized in each transaction will stave off massive mistakes in the acquisition and operation of the investment.

Beyond the professional team, an asset manager with a mentor that is in the business and operates a similar business model is imperative.  This can be a greater “tell” for an investor than track record.

The Cycle

The mark of an asset manager with experience is longevity and their experience through an entire investment cycle.

We’ve discussed on many other occasions how commercial multifamily, like other asset classes, is subject to economic highs and economic lows.  Another way to put it:  there will be periods of bull market runs and periods of bear market runs.

If your asset manager has managed investments through both the highs and the lows, that should give you a good indication of how your manager will function throughout your investment period.  Of course, historical performance by any asset manager is no guarantee of future results.

The Fallacy of Many Assets

A shortcut many prospective investors attempt to take is the question around how many assets an asset manager looks after in their portfolio.   While this may seem like a question that gets to the heart of the matter, that isn’t necessarily true.  This line of questioning makes a rather large assumption.

This question assumes that the quantity of assets equals quality assets.  Again, avoiding this very large assumption is important to your investment health.

All assets are not created equal and consequently, each asset will have its own unique set of risks and rewards.  Asset managers that have a business model that is dependent on acquiring assets will often turn the other cheek when presented with a less than stellar investment.

Most importantly, adding these assets regardless of quality means that an asset manager may indeed be able to claim quantity, but not necessarily quality.

Conclusion

In conclusion, it can be trickier to select an asset manager than what first meets the eye.  What seems like a great question to ask — assets under management — turns out not to tell the whole story.  Other factors like education, industry partners and mentors play a large role.  Finally, any prospective investor should seek understanding of their asset manager’s business model.  This understanding helps to fully assess the motivation behind investing activity.  This due diligence will pay dividends in the end.  Perhaps literally.

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