Low interest environment
Should the global economy remain within a “lower for longer” inflation and interest rate environment, and as real assets themselves become increasingly well understood, there is room for yield compression in many of the underlying investments.
The five core real asset classes and investments within each underlying specific real asset class sector will each respond differently to varied economic environments.
Some are more tilted to the economic cycle than others, some are more correlated with inflation, while others specifically take on commodity and other risks.
Diversification
The rationale for a diversified portfolio of real assets is to reduce the risks inherent in individual real asset and sub-real asset classes and provide a solution offering a consistent real asset return profile over time.
The real asset universe is broad and varied, but does share a number of common characteristics.
Firstly the universe is linked, to varying degrees, with the global growth cycle.
It is therefore more likely to post good returns in a positive economic environment.
Secondly, much of the universe offers inflation-linked cash flows and thus protection from rising inflation.
Thirdly these cash flows, whether delivered via a coupon or a dividend, provide an attractive level of income.
And finally, to date, the universe has seen much lower mainstream investor participation than the traditional asset classes which we believe provides a relative value opportunity.
Structural trends
Underpinning each of the specific real asset opportunities there are a number of structural trends supporting long-term allocation of capital.
Infrastructure: Global demand for increased infrastructure spend, either through the broadening of China’s ‘One Belt One Road’ initiative or a large scale US led fiscal stimulus package aiming to boost economic growth.
Property: The shift to e-commerce provides opportunity within the logistics and retail warehousing sectors, while the demographic profile and limited government budgets provide a range of attractive investment opportunities in Healthcare, Social housing and Care Homes.
Commodity: The shifting energy mix to tackle climate change coupled with the geopolitical and multilateral agreements to reduce greenhouse gasses provides a fertile opportunity set to invest across renewable asset classes, while many ‘traditional’ natural resources, such as copper have compelling supply demand dynamics, while trading at attractive valuations.
Finally, the retrenchment of investment and corporate banks from traditional financing has created a rich opportunity set for many institutional investors to provide capital at attractive rates across the specialist lending and asset finance sectors.
In summary, the global interest rate policy environment enacted by central banks post the global financial crisis with associated low yields, accompanied by weak economic growth and benign inflation appear somewhat entrenched in developed economies.
