Real Assets have always held an important role in institutional investment portfolios as diversifiers, but CAMRADATA’s latest whitepaper on Real Assets considers the difficult question of what diversifying characteristics this asset class holds, as the world faces low inflation and the cost of the pandemic.
The whitepaper includes insights from firms including AMP Capital, Waverton, Centrica, Redington and Law Debenture who attended a virtual roundtable hosted by CAMRADATA in December 2021.
The report highlights that answering what real assets are helping investors diversify from is not an easy question to answer. Interest rates look like staying lower for longer, but the cost of containing the pandemic has introduced fears of rising inflation.
Also, some years ago markets were convinced that central banks would reduce the debts on their balance-sheet incurred from the Global Financial Crisis by means of well-paced inflation.
As a result, for 2022 investors in real assets need to mull their defensive capabilities against rising inflation that may or may not be well managed by central banks and national policy response to the pandemic.
Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “A longer-term perspective on real assets is how they meet society’s needs as the rich world ages, decarbonisation takes hold and national security has to take into account not just armaments and energy but also food, water and weather.
“Our panel considered what infrastructure, buildings and commodities we need for the decades ahead, and how this may influence the decisions made by institutional investors today with regards to using real assets to diversify their portfolios.”
The event began by asking panellists how they define and categorise real assets. There followed a discussion around the various assets that investors have been recommending to clients such as renewables, infrastructure and real estate and the opportunities brought about by the COVID-19 pandemic in these areas.
The panel then focused on the issue of benchmarking and the parameters by which they judged long-term performance, and the challenges of finding value in certain assets such as renewables, before addressing the concern that investors are overpaying for many real assets.
Other talking points included how to measure real assets, geographical spread and issues with overseas investments such as governance, before ending with the panel stressing the importance of engagement between asset managers and investors
Key takeaway points were:
- One panellist said the purpose of real assets was to hedge long-term liabilities by generating income that is inflation-linked but also to deliver returns in excess of gilts.
- Another said the appeal of real assets was that it was almost impossible to get sufficient inflation-linked cashflows from public markets these days at a reasonable price.
- On benchmarking, a panellist said their parameters for long-term performance were a return of UK CPI +4% with two-thirds of the volatility of the equity market, roughly 10- 12% per annum. They noted that the returns should come from both the underlying real assets and management execution.
- Most panellists agreed that finding value in renewables was becoming increasingly challenging, with one adding that new pricing is tighter unless you are lending into the construction stage or more complex jurisdictions.
- It has always been difficult to measure real assets, with one panellist saying they accepted that IRRs are about the best measure, but you never know until you get to the end of the investment.
- Another said their focus was on IRRs, saying an absolute benchmark return for clients in real estate is easier: you can compare UK core property. But measuring inflation linkages across different types of real asset becomes more difficult.
- The panel were asked, what about publicly available indices? Just about everything is being indexed at the moment. However, indices for listed real assets are still few and far between said one panellist in response.
- The panellists agreed on the struggle to find value in public markets, especially gilts. However, one added that pockets of concern for them in real assets included too much money chasing too few ESG-worthy projects.
- On real estate, another noted “beds and sheds” was the name of the game as investors shunned office and retail for residential and logistics. People follow themes, even if yields on logistics were fairly low already and tightening.
- The volatility in merchant pricing for power over the last 12 months was noted. Analysts have long championed the decline in costs of producing renewable energy, but the shocks of 2021 suggested that the energy transition would be longer, more disorderly and – for some – more expensive than predicted.
- In terms of financing real assets, especially new types such as in digital infrastructure and renewables, the UK has proven an innovative arena for structuring deals.
- It was suggested that within pension funds, analysts seek to engage with managers to define their actual needs and negotiate such terms. The fear is that some pension funds may not always devote the required energy to negotiate better investment terms and stronger governance structures.
- The final comment of the event was that asset owners want more control and co-investing: it is getting harder to justify big fees and carry. Instead, there will be more engagement between managers and investors. Private markets investing cannot just be a remuneration programme for managers.
To download the ‘Real Assets’ whitepaper, click here.
For more information on CAMRADATA visit www.camradata.com