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Political upheaval, sluggish growth, and concern over possible bubbles in some emerging economies are just a few of the bigger developments combining to give institutional investors the jitters. In the search for an anchor to windward, “we have seen a significant uptick in investor interest in listed real assets this year compared with 2015,” says Steve Dunn, executive vice president and head of global distribution at Cohen & Steers. Sponsors of 401(k) and other defined contribution plans are among those taking a closer look at real asset solutions, typically as a sleeve in a target date or target risk fund.
Because real assets — including real estate, infrastructure, precious metals, commodities, timber, and farmland — typically have low correlation to stocks and bonds, they can reduce portfolio volatility while offering potentially higher yields, a hedge against inflation, and steady cash flows.
Commercial real estate
Commercial real estate continues to attract strong inflows. One factor is the blistering growth rate of global cities themselves. United Nations projections have the population of Beijing growing 18.7 percent by 2020, Kuala Lumpur by 14.7 percent, and even developed-nation metropolises like Washington and London adding a substantial 5 percent or more each. A recent study, “Global Cities: The 2017 Report,” by Knight Frank, a residential and commercial property consulting firm in London, ranked Manhattan, London, Los Angeles, San Francisco, and Paris as the top cities in investment volume for the first six months of the year.
| A low correlation to stocks and bonds means real assets can both reduce volatility and offer potentially higher returns. |
The election of Donald Trump could lead to higher growth as well as inflation in this sector. Nora Creedon, managing director and portfolio manager at Goldman Sachs, speaking as a panelist at the National Association of Real Estate Investment Trusts (NAREIT) annual convention in November, said that the consensus outlook was for potentially higher growth at 5.5 to 6 percent cap rates.
The November election results could also prompt some investors to reallocate capital to industries likely to benefit from increased U.S. infrastructure spending, says Steve Sakwa, senior managing director and a senior equity research analyst at Evercore ISI. The incoming Trump administration is expected to consider an infrastructure bill to stimulate the economy in 2017.
Investors may also be able to capitalize on worldwide infrastructure opportunities. A recent KPMG report, “Global Infrastructure: 10 Emerging Trends,” points to new sources of capital and new funding approaches as one of the factors that will change the infrastructure sector over the next five years. Other trends include the “growing boldness of governments” seeking economic and social benefits and better alignment of government’s interests with the “microdecisions” of consumers.
A wide range of strategies
Real assets are a diverse category, both in the range of assets themselves and in the ways in which they can be packaged. Institutional investors can take their pick of a variety of strategies, including publicly traded assets or private investments, a variety of sectors from timberland to energy, and an assortment of geographic regions.
Multistrategy funds can also play a role. “There are very diverse global opportunity sets within the real asset class,” says Dunn, noting the importance of finding solutions aligned with investors’ goals and mandates. Some investors need liquidity, while others are more focused on steady income, higher returns, or reduced volatility, he adds.
Looking ahead, Vince Childers, senior vice president and real assets portfolio manager at Cohen & Steers, says many institutional investors are still underallocated to real assets, based on their investment policy statements. “During this recent commodity downturn, being underweight there has served them well,” he says. “But now they are looking to increase their allocations to real asset classes.”
—Richard Westlund