JPMorgan: Real Assets Are the New Bonds

For corporate pension plans that think volatility is coming, but want to keep some upside, income-producing real estate, infrastructure and other real assets may be the answer.

(Paul Yeung/Bloomberg)

(Paul Yeung/Bloomberg)

Corporate pension plans should consider investing in real estate, infrastructure and transport, an asset category whose income-producing features rival those of long-duration bonds, according to a report from JPMorgan Chase & Co.'s asset management unit.

The report, which will be released in the coming weeks, says corporate pension plans need to dampen volatility while setting the stage for some upside in their investment portfolios.

Pulkit Sharma, head of investment strategy and solutions at J.P. Morgan Alternatives Solutions Group, said in an interview, “plans can improve their outcomes—whether it’s risk reduction or returns enhancement that they want—by adding as little as 5 percent in core real assets to their portfolios.”

Many corporate pension plans have been putting in place so-called liability-driven investment strategies to protect their funded status, the amount they have on hand to meet their promises to retirees. By using long duration bonds to match assets and liabilities, they’re trying to avoid the losses they incurred in the bear markets of both 2000 and 2008 when they failed to protect years of equity bull market gains.

The average corporate pension plan is now about 90 percent funded, says Sharma. The problem with LDI strategies is that corporate plans often end up protecting their portfolios from volatility at the expense of possible gains. Adding real assets can help, at least on the margins.

“Well-constructed core real assets portfolios can capture the best characteristics of both equities and bonds,” said Sharma.


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Corporate pension plans that have not implemented liability management can also benefit from these assets, which are considered core if their cash flows are stable over a very long period of time. Regulated utilities, real estate in developed markets with stable tenants, infrastructure, and even ships, aircraft and rail cars are examples of assets that have long-term contracts with cities and major corporations.

Global core real assets can produce two or three times the income of core fixed income or core equities, with less than half the volatility, according to the J.P. Morgan Asset Management report, entitled “The Role of Core Real Assets in Liability Aware Portfolios.” In addition, the assets are often uncorrelated with other holdings, as their performance is tied to local market conditions.

“A diversified real assets portfolio displays lower volatility (less than half vs. public equities), lower correlations with traditional asset classes and lower equity beta—an important feature, as public equity exposure often accounts for the majority of funded status risk in a typical corporate pension portfolio,” Sharma and his co-authors wrote in the report.

There is no shortage of real assets. JPMorgan estimates that the category totals more than $20 trillion globally, with 95 percent in real estate, infrastructure and transport. Real assets are tangible: for example, property that people live and work in. Unlike stocks and bonds, they often are less liquid, meaning they can’t be bought and sold as quickly or easily. Sharma says the illiquidity of real assets is offset by the stable income they produce. Historically, more than 70 percent of real assets’ total return is from income, according to the report. That income can help offset any losses during market downturns.

Real assets can help corporate plans bridge the 150-basis-point gap between what pensions are expected to earn on their portfolios on average, and J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions, the firm’s market forecast.

“This disparity cannot likely be filled with manager alpha alone, especially if passive investing is used across certain asset classes,” the authors wrote in the report. “Allocating to core real assets represents an elegant solution to the expected return gap compared with increasing public equity allocations at the expense of increased funded status volatility.”