What options do investors have for investing in this commodity-oriented investment type?
Investing in real assets
Over the course of this year, a major issue facing investors is how to deploy capital as the cycle matures. With portfolio resilience at the forefront of many people’s minds; secured cash flows, alignment with long-term trends and ESG-aware investment choices are becoming imperative. The investor migration into real assets has steadily gained momentum over the last decade and shows no sign of slowing. In 2018, closed-end real estate and infrastructure funds experienced an inflow of $203 billion, whilst Blackrock’s 2019 Global Rebalancing Survey showed that 54% of investors anticipate their allocations to real assets increasing in 2019. The fundamentals underpinning real asset performance remain generally constructive; however a fluctuating macroeconomic environment requires careful navigation.
Real assets are physical assets which have an intrinsic value due to their physical form and do not rely on monetisation and/or exchange in order to provide value for its owner. Examples include precious metals, commodities, land, real estate, equipment and natural resources.
They generally exhibit moderate-to-low correlation with financial assets and thus investors are able to achieve strong diversification benefits by including them within their portfolio. Secured cash flows, like those from energy servicing, provide predictable and steady income streams for investors - making them less volatile than financial assets. Their ability to benefit from long-term structural trends, such as the rise of e-commerce increasing demand for logistics infrastructure, helps to drive future risk-adjusted performance. Finally, the fact that their income and values tend to grow along with inflation, means they provide a good hedge against rising price levels.
However, real assets have lower liquidity than financial assets due to them typically being cumbersome to exchange and their markets not as efficient or populated. Furthermore, higher carrying and storage costs for some of the assets can make the asset owners vulnerable in times of faltering demand. Due to the spectrum of real assets being so large, stock selection becomes a real challenge. These less-than-liquid assets require sector expertise, something of which may be lacking amongst most private investors. Therefore, investing in funds or investment trusts can provide a credible way to gain exposure to real assets without the direct liquidity constraints.
With a current environment of interest rates at historical lows and stock market valuations at historical highs, investors are justified in looking elsewhere for their investment needs. Moreover, the ability of real assets to protect against the downside makes it an appealing investment case late cycle. Competition for real assets is strong as capital-raising continues to outpace deployment, providing a supportive environment for them to continue appreciating and outperform financial assets in the coming decades. It can be argued that investors should adopt an international view of real assets in order to seek the best risk-adjusted opportunities, whilst also support the construction of a diversified portfolio. Furthermore, identifying investable structural change and strategies which advocate ESG integration is essential for driving long term performance.
A fund-of-fund structure makes a great deal of sense in this space, as an active fund manager will identify the best funds specialising in various real assets such as property or infrastructure contracts.
Architas Diversified Real Assets aims to protect investors against rising inflation and provide asset class diversification away from traditional asset classes. This is achieved by investing in a collection of investments that individually have low correlation to equities and bonds and generate a stable income derived from investments in the likes of: specialist property, infrastructure, asset-leasing and asset-backed securities. The fund should perform consistently in most market conditions as it is not reliant on one particular factor, whilst in periods of strong demand for real assets or rising inflation the fund will likely prosper.
Alternatively, if investors have a particular view on an area of the real asset spectrum that may experience future growth then the following funds can potentially provide exposure to these:
First State Global Listed Infrastructure focuses on companies involved in infrastructure which can self-fund the expansion of their asset base, generate stable revenue and pay a growing dividend. The actively managed mix of defensive and growth holdings has allowed strong performance against its benchmark index and global equities, whilst also providing investors with a defensive income.
Merian Gold and Silver is a specialist fund providing exposure to both gold and silver bullion as well as companies involved in gold and silver. The ability of the manager to tactically allocate the portfolio depending on the precious metal market conditions should allow outperformance of both prevailing spot prices and peers. The fund is especially suitable for investors wanting to hedge against inflation and current central bank monetary policies.
iShares Global Property Securities Equity Index represents a strong passive option in a category where active managers have struggled to outperform. The index provides cap-weighted exposure to Real Estate Investment Trusts (REITs) and global listed real estate companies. Significant geographic exposure to the United States should help to mitigate some of the Brexit-related risk that other funds may be exposed to in their UK focussed holdings. The very reasonable fees also make it one of the cheapest in the category.
The Investment Trust space allows vehicles to be created which allow access to institutional-quality private funds that typically carry investment restrictions and lock-ups.
JPMorgan Global Core Real Assets (JARA) is launching shortly (at time of writing it has just completed its IPO), giving exposure to long-term income-orientated “core” real assets across a diversified portfolio of Global Infrastructure, Global Real Estate, Global Transportation and Liquid Real Assets. The fund will target a 7-9% net return inclusive of a 4%-6% income yield, achieved with low sensitivity to equity markets and high inflation sensitivity by focussing on stable, uncorrelated cash flows.
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