Can investors harvest good returns from real assets?

Can investors harvest good returns from real assets during a late-stage economic cycle? New CAMRADATA whitepaper looks at the risks and opportunities with tangible assets…

CAMRADATA, a leading provider of data and analysis for institutional investors, has published its latest whitepaper, the Changing Face of Real Estate, Infrastructure & Real Assets, following a recent roundtable discussion in London with asset owners and investors which explored opportunities with these investment strategies.

The participants were from Manulife Asset Management, London Borough of Lambeth Pension Fund, Marks and Spencer Pension Trust and Transport for London Pension Fund.

The group discussed the fact a growing number of institutional investors are embracing real assets such as infrastructure and property. Data from the UK’s Investment Association highlighted that by the end of 2017 its members held £255bn in infrastructure, direct lending and commercial property on behalf of clients.

Sean Thompson, Managing Director, CAMRADATA said, “The UK population is estimated to reach 70 million people by 2027 and investment in infrastructure will be vital as the demands upon it increase. This investment is not only essential for economic development but presents major opportunities for institutional investors too.”

One area of discussion was the growing appeal for investors of owning buildings, windfarms and waste incinerators.

Padmesh Shukla, head of investments at the £11bn Transport for London Pension Fund, said that real assets provide strong portfolio diversification, in many cases providing inflation hedge and secure income.

Investment in forests and farmland was also discussed by Sydney McConathy, head of business development for Hancock Natural Resource Group (HNRG), a wholly owned subsidiary of Manulife Financial Corporation. On behalf of institutional investors, the company manages approximately six million acres of forest and 340,000 acres of farmland around the world.

Sydney said the returns generated by both farmland and forestry have been genuinely uncorrelated with the returns of the traditional financial assets that dominate the portfolios of institutional investors with a long timeframe.

HNRG’s internal research group has demonstrated that the addition of a combination of forestry and farmland can lower the volatility of an institutional portfolio and boost its risk-adjusted returns.

The pension funds at the roundtable had limited experience of investing in trees and crop fields. This limited experience with farmland and timberland though is not surprising, given the size and accessibility to investors of these asset classes.

Asset owners estimated that returns from forestry and farmland would be around 11% and 12% gross.

Other topics discussed included what a client of a timberland or farmland strategy actually owns, market risks and physical risks, such as weather and climate change, plus the fact forestry is a patient business with wealth increasing with the age of a tree.

For example, trees less than ten years old are likely to be utilised for the production of pulp, paper, packaging and wood-based energy, while larger logs from the same forests (25 years or older) can be converted into higher value building products for the construction industry.

Finally, the panel highlighted that owning biological assets seems instinctively to satisfy the increasing responsibilities of institutional investors towards the environment. ESG is increasingly becoming a vital consideration in the investment strategy and process for any responsible long-term investor.

Sean Thompson concluded, “This first roundtable of the year provided food for thought about investing in real estate, infrastructure and real assets. Rising population numbers and the move to more responsible investment strategies means there are opportunities. But these must be weighed up against market risks such as economic downturns and market cycles, as well as physical risks to trees and crops.”