SAN DIEGO—Investing an imaginary $1 billion for the best return is the objective of an annual, national competition called the “Real Confidence University Portfolio Challenge.” One of the companies sponsoring this challenge is Altus Group Limited, which owns the subsidiary ARGUS Software, whose Enterprise and Developer programs are widely used in the real estate industry. ARGUS puts on the ARGUS University Challenge each year, and three of the four team members for the Real Confidence University Portfolio Challenge were also on University of San Diego's winning team in the 2014 ARGUS University Challenge—in fact, USD has won six of the eight ARGUS University Challenge Competitions. GlobeSt.com spoke exclusively with Victor Alfonso, VP of Brixton Capital, and Jon Mesa, VP of Wolverine Ventures, both 2015 graduates of USD's Master of Science in Real Estate program and teammates in the fantasy-style Real Confidence challenge, about their strategy this year. Other USD members of the team include Omar El-Mofty, asset-management analyst at Invesco, and Bradley Williams, senior associate with Flocke & Avoyer, both also 2015 MSRE graduates.

GlobeSt.com: What is your approach/strategy for the Real Confidence University Portfolio Challenge?

Alfonso: The challenge is basically to allocate $1 billion of capital between the public, private, debt and equity quadrants. Within those, you can break it down by property types and also by region, so you can get pretty specific about where you want to allocate the capital. There are no restrictions as to how diversified or concentrated the portfolio needs to be. It's similar to a stock-market challenge, where you pick your horses and track the returns to the market as if it were a real portfolio. There are 15 universities throughout the nation participating, and we're one of the only ones on the West Coast—and these are notable universities.

Our strategy is that we wanted to balance diversification with a concentration among the different potential sectors. This is a one-year outlook, so if we were to diversify too heavily, we would only achieve average market-level returns. In order to beat the market, we knew we have to be somewhat concentrated, so we decided to be concentrated in pure equity. We chose to allocate zero to debt because of the current interest rate and competitive environment. Within the equity, we wanted to be heavily concentrated within the public sector and focus on REITs so we have stock-market exposure, which is outperforming the private sector considerably. We invested $500 million in office REITs and $300 million in multifamily REITs, and the other $200 million we placed in the private sector of hotels on the West Coast. Why hotels? We were tempted to place hotels on the REIT side, but in the public sector and REITs, we weren't able to break it down by region—you could do that only in the private sector. We looked at RevPAR and saw significant growth and occupancy on the West Coast specifically. We think the strong dollar is hurting tourism on the East Coast. Plus, the new supply on the East Coast is much more prevalent—we're supply constrained here on the West Coast. It's not going to be a significant part of the portfolio, but enough to have some exposure to it.

GlobeSt.com: How did you come up with this strategy, and how do you expect the portfolio to perform?

Alfonso: We were given this assignment, and we had a couple of weeks to figure out our strategy. We basically sifted through and analyzed massive amounts of data and looked at returns for the current quarter; then one-year and three-year returns; then looked at forecasts and delved into some qualitative factors including demographic trends. We expect it to perform either in the top or bottom three—that's the nature of having a heavily concentrated portfolio. We knew if we were going to win, we had to go for the gold.

Mesa: In terms of how it performs relative to the market, we're expecting it to outperform the market. One of our thoughts was maintaining a very specific portfolio of sectors that will outperform the market over the next year and generate alpha on the return. Obviously that's our hope.

Our MSRE program definitely has a very good reputation in competitions like this. Three or four members of our team were in the ARGUS competition that won in 2014, so we have a very solid competing reputation, and we expect it to do well. There's a consensus that all the property sectors we chose will do well over the next year.

GlobeSt.com: What factors do you think most affect a commercial real estate portfolio's performance in today's economy?

Alfonso: From a macro perspective, employment trends are number one. This has such an effect on every sector. Then, global capital markets, which are driven by the availability of capital and interest rates. From a micro perspective, the geographic makeup of a portfolio will impact the portfolio, particularly if it's concentrated in gateway and core vs. secondary and tertiary markets. The challenge didn't allow for us to break it down like that, but in the real world that will affect performance. More and more research is also showing that portfolios with sustainability perform better, which makes sense because the operating costs in these property tend to be lower than in buildings that haven't been renovated in years.

Mesa: At the end of the day, it comes down to the strength of your end user. How is your ultimate client going to fare over the next year? Hotels, multifamily and office are our focus, so between business and leisure travelers in hotels and Baby Boomers and Millennials in multifamily and office, those sectors are doing well and were among our thoughts in portfolio selection.

GlobeSt.com: What else should our readers know about this challenge?

Alfonso: Since the terms are measured over such a short period of time, there will be a bit of luck required, but we're feeling pretty lucky. We're excited to represent USD's MSRE program and the school as a whole.

Mesa: The program does a good job of emphasizing that we as students maintain a sense of what's going on in the market and how it relates to principles we're learning in the classroom.