Almost all innovators have a light-bulb moment. In the case of one wealth manager, this appears to have happened when they were looking at the light bulbs in underground car parks. By financing their replacement with energy-efficient LEDs, savvy investors have been able to share the cost savings with the car park owners, earning themselves a strong cash yield.
In a late-cycle equity market, it is access to this kind of uncorrelated “real” physical asset that has attracted wealth managers to private equity group Earth Capital — and recently led the group’s chief executive, Edward Collins, to describe wealth managers as the real “innovators” in asset allocation.
In fact, as the equity market cycle grows ever later, more managers are seeking to get real. “Real assets are a good late-cycle investment, when increasing volatility can offer interesting entry points into areas that have low correlation with other asset classes,” explains Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management.
He favours property, for its ability to provide a hedge against inflation. For much the same reason, Stefan Löwenthal, chief investment officer at Macquarie Investment Management, allocates to infrastructure because of its “defensive characteristics, which we feel is important given where we are in the current market cycle”.
But as cyclically high equity markets drive wealth managers into the same real asset classes, prices have been rising. Indeesh Tangeraas, head of real assets for Europe, the Middle East and Africa at Cambridge Associates, observes that “investor interest within core assets has increased valuations”.
That has led some to suggest a need for further light-bulb moments — to help investors see beyond conventional real assets to the more esoteric.
Conventional real assets used to be divided into three main areas, and at Tangeraas’s firm they still are, essentially — namely “real estate, infrastructure and natural resources”.
Some, however, now broaden the definition, and the choice. At investment manager Waverton, real assets are all “investment opportunities underpinned by physical assets, predominantly with highly predictable cash-flow streams”, which takes the number of classes to five: property, infrastructure, commodities, asset finance and specialist lending. Mark Versey, chief investment officer at Aviva Investors Real Assets, which has £40bn under management, also favours a wider “underlying physicality” definition, which brings in ships, facilities, machinery plus timber, and farmland.
Strict classification seems to matter less than equity market correlation, or lack thereof. “Recently, there has been a blurring of lines within the three core components of real assets,” says Tangeraas. “While high-level real estate, infrastructure and natural resources provide a category for most real assets, there are many ‘inbetweeners’, which creates a uniquely diverse asset class.”
For James Mee, fund manager at Waverton, diversity and diversification is all. “Real assets in aggregate offer both a return enhancement, especially when compared with returns available on bonds, and a diversification benefit,” he says. “Many real asset opportunities generate returns commensurate with equity markets, generally on a lower level of volatility and, importantly, with a low correlation to both equity and bond markets.”
In addition to their stabilising effect, the nature of real assets can help wealth managers achieve the primary need of many multi-generational clients: capital preservation. Property, infrastructure and farmland, Versey points out, “are long-term investments which often have a strong linkage to the inflation in the real economy, giving investors the opportunity to outperform the growth in the cost of living”.
So, which assets to use? Some portfolio managers are comfortable with the conventional. Property still does the job for Versey at Aviva Investors. He favours office space in London and Paris, “emerging sub-locations in European cities”, as well as property debt. Justin Ourso, head of real assets for Nuveen, which has $129bn of assets in property, also likes commercial property debt.
Infrastructure retains its long-term appeal for Macquarie. “The growth of emerging markets and their long-term demand for infrastructure investments means we also see significant long-term structural demand over the next 10-30 years,” says Löwenthal.
Forestry has become even easier for London & Capital’s clients to gain exposure to, via a fund offered by specialist asset manager Gresham House. “This has proved very effective for our clients from an investment and inheritance tax planning perspective,” says Iain Tate, a partner in L&C’s private investment office, noting a long-standing fiscal incentive granted by the UK government that exempts sustainable forests from inheritance tax.
But, as Tangeraas says, “many real asset markets, such as real estate, appear expensive today”, making the more niche, or esoteric, worth exploring. Looking for a conventional real asset class that benefits from growing demographic or secular trends is the approach at Cambridge Associates. That narrows the classes down to senior care homes and student housing, logistics warehousing, and agribusiness to feed urbanising populations.
Waverton’s Mee looks deeper within the conventional classes. “One subset of the property real asset class, where valuations appear particularly appealing, is the UK supermarket sector,” he suggests.
Aviva’s Versey and Macquarie’s Löwenthal take the agribusiness specialism even further. “Land-based fish production,” says Versey, citing the chance to invest in production facilities using water recirculation technology to produce Atlantic salmon in a sustainable manner. “Chicken!” says Löwenthal, noting that the retail price of chicken tends to rise with inflation, or by more since swine fever has hit parts of China.
Many of these more specialist assets classes may be accessed by private investors via funds, or through private equity groups that allow wealth managers, family offices and institutions to participate with a minimum $10m investment.
But Jim Totty, Earth Capital’s UK managing partner, is one of many looking to change the light bulb altogether. “There is an existential crisis approaching for many of the sectors traditionally relied on to provide yields, such as oil and gas and automobiles. Combustion engine vehicles will come under pressure as electric and hydrogen-fuelled engines undercut them on capex, fuel costs and emissions.
“In contrast, sustainable infrastructure will weather this storm and offer stable yields. Energy efficiency and energy storage are now also establishing themselves as a proven asset class, with investments in efficient lighting for car parks, battery storage, and combined heat and power projects, all now being financed in a listed equity ‘yieldco’ structure.”
Such structures will appeal even as the physical structures evolve, hints Tangeraas. “Today, we hear about hotels in outer space.”