INVESTING in “real assets” — tangible things such as roads and office buildings — provides diversification and in some case a hedge against inflation.
Complexity and lower liquidity can put off some investors.
But it’s worth understanding the asset class, because it helps provide diversity, allowing investors to design portfolios that better suit their needs, argues Michael Blayney, who heads up Pendal’s multi-asset team.
For Pendal’s multi-asset strategies, Blayney’s team prefers infrastructure assets that are linked to inflation, have low sensitivity (or beta) to equities, and have a better environmental footprint.
“Investing in infrastructure is complex because it depends on a range of variables like the type of asset, the regulatory regime, how it is structured and financed, and whether or not income is inflation linked,” says Blayney.
There is complexity around whether the asset is regulated with prices set, or managed, by authorities.
There are also risks associated with future changes in policy, including in some cases taxes on “super-normal profits” such as occurred recently in Europe with windfall taxes imposed on energy producers in a number of countries.
Assets exposed to the storage and distribution of fossil fuels can also have “stranded asset” risks that need to be assessed.
Infrastructure assets come in a wide variety of forms.
Assets might be ‘pure-play’, such as only solar or wind — or they might be a mix, Blayney says.
They might be operational or in development.
Pendal tends to hold infrastructure assets that are predominantly operating assets with some development exposure to boost future returns.
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“While we do have a large focus on renewables, in addition there is a broad opportunity set, including digital infrastructure like data centres and mobile phone towers.
“There are also PPP (public-private partnership)-style assets where, for example, you might have a concession to provide the facilities at a hospital.”
The variety of options allows investors to design portfolios that suit their needs.
Blayney’s team focuses on infrastructure assets that are directly or indirectly linked to inflation, have low sensitivity (or beta) to equities and have a better environmental footprint.
The focus on inflation linkage means net asset values in the portfolio have remained relatively robust, or in some cases have increased, Blayney says.
”Our portfolio is greener than a traditional infrastructure portfolio, and when you combine that with the low economic sensitivity of cash flows it’s a great addition to an overall balanced portfolio.”
Also falling within the real asset category of investing is property.
“In the global listed real estate sector, there are significant headwinds around the office and shopping centre sectors. And there is industrial property which has significant tailwinds because of e-commerce,” Blayney says.
“Once upon a time industrial property was seen as being a bunch of sheds in the middle of nowhere. These days, the logistics facilities are much higher tech and harder to replicate.
“Overall there are clearly some parts of the property sector which are structurally challenged.
“Across the whole property sector, there are challenges in terms of the higher interest rate environment making valuations look less interesting relative to bonds.
“As such, we’d want a bit more of a margin of safety before getting more positive on global REITs like we were a few years ago when prices where cheaper.
“While both have a place in a portfolio long term, at present as between property and infrastructure we have a strong preference for the latter.”
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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