Reality isn’t what it used to be.
And investors will need to different strategies to cope with radically altered market conditions expected over the coming years, according to Salt head of global diversified funds, Greg Fleming.
In a new paper published last week, Fleming says demand is rising for assets immune to “suppressed interest rates and mounting inflation risks”.
“Confronted with unexpected and potentially persistent inflation for the first time in years, investors are being advised to diversify into real assets,” he says.
But reality-based assets – broadly defined as those “linked to tangible holdings with intrinsic value” – comprise a wide range of, mostly private market investments including land, art, precious metals and commodity futures.
“However, these are prone to speculation and illiquidity,” Fleming says in the paper.
While the majority of real assets trade in opaque private markets, he says a “substantial minority” are now available on public exchanges.
“The judicious deployment of listed real assets in a portfolio, by contrast, can introduce inflation-proofing without multiplying such [private market] risks,” Fleming says.
Listed and real can clearly live together: note the rise of listed real estate investment trust (REITs) both in NZ and offshore over the last few decades.
If REITs have shown the way, global listed infrastructure is following not too far behind.
“Listed infrastructure as an asset class is in a similar position to REITs 20 years ago,” Fleming says.
Still a relatively young asset class, listed infrastructure features “slightly different performance drivers and sensitivities” than property, the Salt paper says, while both share “generally superior dividend yields”.
Infrastructure, though, offers some unique features – such as inflation-linked revenue sourced from ‘wide moat’ regulated businesses – that “are becoming attractive for investors reacting rationally to low bond yields and leery of the riskier, momentum-driven elements in equity markets”.
“It is emerging that well-chosen infrastructure assets are very well adapted to a prolonged period of low real (inflation-adjusted) interest rates, and while the associated investment securities are not likely to beat the broader market over years during a sustained bull market, they can prevail in the longer run, due to lower overall loss of value, continued dividend streams, and the consequent benefit to compounding investment returns,” Fleming says in the paper.
While listed infrastructure can lag wider equity markets – as it has this year – the study says historical data shows the asset class has outperformed both shares and bonds “when inflation is high, when it is rising, and when it surprises on the upside”.
Last week Salt officially opened its new global listed infrastructure to tap into the increasing investor demand and opportunities in the asset class.
The portfolio investment entity (PIE) Salt Sustainable Global Infrastructure Fund, managed by US-based real assets specialist, Cohen & Steers, kicked off with about $10 million from seed clients.
Fleming says the fund currently holds about 60 stocks out of the investable universe of 245 – held in the FTSE global infrastructure 50/50 index.
As per the name, the new Salt strategy also leans to infrastructure assets poised to benefit from the energy ‘transition’ away from fossil fuels.
“Our own approach is to guide the Infrastructure portfolio in the direction of pro-transition utilities, as well as applying rigorous scrutiny to improvements in the transportation sector, which is the other large component of our fund’s benchmark index and actual portfolio structure,” the paper says.
Fleming says listed infrastructure has a place in both growth and income portfolios – Salt includes the new fund in its diversified strategies – but investors should set allocations for a, realistic, long-term horizon.