Real assets, a long-term trend supported by the transforming world
What does the real asset class encompass and why is it so popular?
Real assets vs. “Listed” assets
What can explain the growing appeal of ‘real’ assets, like property and infrastructure, compared to publicly-traded listed assets such as bonds and equities?
In part, it is because real assets offer investors a closer connection with their capital – giving them a sense that their money is helping to finance activity that is good for economies and societies. They have, for want of a better term, a ‘feel-good’ factor. This is not to deny listed assets have their advantages; they are more liquid, while the growth of electronic trading and other technologies have led to easier market access and high levels of transparency. At the same time, there are understandable concerns among many investors about the gap that often exists between a company’s market value and their true value; a trend highlighted by the rise of technology stocks in recent years, which trade at multiples not reflected by their profitability. Meanwhile, in bonds, a decade of easy monetary policy has created a situation where over a quarter of the market now carry negative yields – or, to put it another way, investors are effectively paying companies and governments to lend them money. So, beyond the emotional appeal of real assets, their growing appeal to investors is rational financially. In short, real assets are an exciting area of opportunity for investors who appreciate their characteristics.
But what does the real asset class encompass and why is it so popular?
Meeting the needs of future generations
By 2030, the world population is projected to reach eight billion, 60% of whom will be city dwellers. Meeting the needs of our generation and those of our children will require significant investment in new buildings, transport, data networks and energy supplies to support urban growth. High-density housing and careful use of resources will only become more pressing in the future. The definition of a real asset investment is also evolving and expanding as innovation continues: 5G infrastructure, data centers and charging points for electric vehicles offer new investment routes. Transport infrastructure also continues to be fertile territory, with electric vehicles in the vanguard. This economic context has naturally attracted large numbers of investors: while sovereign wealth funds led the way in real asset investment at the beginning of the decade, pension funds and insurance company holdings have risen in recent years. Retail investors are also showing a growing appetite for this asset class, even though regulation in Europe can make market access complicated. In an attempt to protect their savings, regulators have paid particular attention to the liquidity of funds investing in real assets, especially those offering daily liquidity. This has created challenges for UCITS or Life Insurance Unit Linked contracts, which drive most of retail savings in Europe. At the same time, authorities do not want to choke off retail access to real assets, knowing their importance to the real economy and benefits to investor portfolios. In France, for example, we are witnessing a major movement to reconcile individual savings and the real economy (LTIF, PACTE laws). We anticipate this will lead the market back towards fundamental and promising investment rules: think long-term and accept less liquidity to maximise returns. These trends are all positive for real assets, but the sector is not without its challenges.
Diversification opportunities to take with care
The diversification and cashflow-matching characteristics such assets can offer against publicly traded securities are well known to investors. The growing correlation between all traditional assets has been another important diversification factor that have led investors towards allocations to real assets. This is why, after searching for diversification in traditional asset classes such as government bonds, high yield and emerging market bonds, real assets have become a way to continue on this path with added value elements such as stable valuations and yields. They then decided to invest in real estate and infrastructure, both at an equity and debt level, as well as in private corporate loans. The potential liquidity premium is another strong argument for investors: with bond yields likely to remain compressed, it is understandable why investors will increasingly look to real assets for positive returns. Indeed, the non-listed securities tend to offer an attractive premium for a quasi-equivalent risk: for example, we can now find some private corporate credits with the same implicit rating as listed companies but offering a better credit spread, and thus a good yield opportunity for investors. Yet while we expect 2020 to be another strong year for real assets, investors will still need to carefully consider all the opportunities and risks when determining their investment strategies. With new entrants coming to the party and existing investors increasing their allocations, there is a risk of ‘overcrowding’ in parts of the market, potentially decreasing the good relative value offered by these assets.
ESG, necessity and work in progress in real assets
One clear trend in the investment sector is the growing influence of environmental, social and governance factors (ESG). Beyond cities, the United Nations’ Sustainable Development Goals (SDGs) will not be delivered without a fundamental rethink of our investments. This naturally affects Real Assets.
If incorporating ESG considerations within traditional liquid portfolios is not an easy task, it could be perceived to be more complex with real assets; requiring a different approach to that used in public markets where information is more readily available. There is an opposing argument, though, that incorporating ESG criteria in portfolios is more straightforward in the real asset world. As ultimate asset owners, investors are not far removed from other key stakeholders, and should therefore be able to exert more influence over decision making. Whatever their opinion is about the influence of ESG on real assets, investors will need to take it into account but via a balanced case-by-case approach.
This economic context has naturally attracted large numbers of investors.
In conclusion, the appetite for real assets is undoubtedly a long-term trend that will expand with new client groups and sectors in our transforming world. We should also gradually see the emergence of a more active secondary market, as is the case in more mature countries such as the US, offering more depth and liquidity to real assets investments and bringing them closer to a fully-fledged asset class.
Inès de DINECHIN
Inès de Dinechin is President of the management board of Aviva Investors France since 2016 (106 billion euros of Assets under Management in December 2018). Prior to joining Aviva Investors, Inès held the role of President of the management board for Lyxor Asset Management and was member of the Executive Committee for Societe Generale Corporate & Investment Banking. For 23 years, she held various positions within the Societe Generale Group’s Investment Banking division,