There are several common reasons that investors offer for why they don’t allocate more capital to real assets — that unlisted assets are all illiquid, or that they don’t perform well in a crisis, for example. But some of these widespread assumptions about the asset class are actually misconceptions, according to Willis Towers Watson portfolio manager Christy Loop.
In a report called “Top Five Myths of Investing in Real Assets,” Loop details and debunks these myths, including assumptions about liquidity, risk, and cost.
“In conversations with clients or prospects around real assets and the role they can play in the portfolio, we tend to hear a number of these potential hurdles repeated on a regular basis,” Loop told Institutional Investor.
Not All Real Assets Are Illiquid
The first myth, she wrote in the report, is that all unlisted assets are illiquid. According to the report, unlisted strategies do not always require capital to be “locked up over a long-time horizon.” Instead, she said that many unlisted strategies in real assets provide consistent liquidity and transparency, despite requiring periodic withdrawals and advance notification periods.
“If you think about the unlisted core or direct real estate, typically, from a transparency basis, you’re pretty well informed in terms of what your sector exposures are because those haven’t evolved really over time,” Loop said by phone. “You have those core food groups, which are office industrial, retail, and apartments and multifamily.”
Unlike real estate investment trusts (REITs) that are publicly traded and provide full transparency to investors, unlisted assets can’t be viewed on a daily basis. But Loop said real assets managers managers provide a “good sense of what they’re investing in on an ongoing basis.”
With unlisted infrastructure, for example, investors need not worry about big changes to their portfolios. “Because they’re hard assets, they’re not going to vary too much over time,” Loop said.
In order to dispel the myth about real assets not offering enough liquidity, Loop recommends that plan sponsors “assess their annual benefit payments relative to the liquidity profile of their assets.” In short, she writes, managers with 40 percent or more liquidity in their portfolio within one month should think about taking advantage of unlisted real asset opportunities.
The second myth Loop cited in the report is also related to liquidity: the idea that liquidity can’t be actively managed with real assets. This assumption, according to Loop, ignores the diversity of real assets opportunities. With a real assets multi-manager fund, she said investors can cut down contribution queues and get access to transactions in the secondary market to put capital to work more quickly.
“The intent of this myth is to challenge institutional investors’ perspectives,” Loop said. Traditionally, institutional investors believe that “if you’re investing in real estate, your capital is locked up for a period of time,” she said. “We’re saying that, actually, if you put together a portfolio of different real asset strategies, you can actually manage liquidity more effectively than perhaps utilizing simply one strategy within real assets.”
According to Loop, the best way for investors and managers to rid their team of this attitude is to invest in the “full array” of both listed and unlisted opportunities. In the report, Loop also recommends that sponsors and asset owners be aware of the state of their cash flow and liquidity at all times, both on the real assets level and across the entire portfolio.
Covid-19 Made Investors “Second Guess” Real Assets
Loop’s third myth: Real estate and real assets can’t provide returns during a crisis or recession. The Covid-19 pandemic, for example, posed devastating challenges to the real estate market: In 2020, U.S. cities’ industrial real estate was the only real estate sector that saw returns of over 20 percent, according to the WTW report. Hotel properties and retail spaces, meanwhile, saw negative returns.
“Covid-19 really made folks second guess real assets, in particular real estate,” Loop said.
In the report, she wrote that the “real assets universe offers a wide array of sectors with different return drivers and risk factors.” While the performance of traditional property types — like office, apartment, industrial, and retail — is often tied to GDP growth, alternative property types, like healthcare, senior and student housing, and social infrastructure are “less economically sensitive,” the report said. Essential technology, data infrastructure, life sciences, and renewables and energy efficiency are also “lesser known drivers of value,” Loop wrote.
In the report, Loop encouraged asset managers to review the diversity of real asset exposures within their portfolios. “By diversifying across themes and sectors, we believe sponsors will be able to increase the cash flow resiliency of the segment, and capture greater longer-term wealth accumulation independent of the market and economic environment,” she wrote.
The next myth she sought to bust was the common belief among pension funds that investing outside of their peer universe introduces risk. While many investors choose to mitigate risk by investing alongside their peers, Loop told II that this practice “concentrates your opportunities more than you intended.” Instead, the report recommends that investors diversify their real asset portfolios and expand beyond traditional sectors.
Finally, with the fifth myth, Loop challenged the assumption that all real assets are expensive, urging managers and investors to look at fees from a “more holistic” perspective.
“It really should be viewed in the sense of ‘how much return am I generating from this investment? and/or ‘how does this increase the overall efficiency of my real asset segment and my portfolio, once I take expenses into account?’” she said. “So, really, just challenging folks to think about that overall impact on the segment and the portfolio, inclusive of fees, but not just necessarily isolating that decision to fees only.”