Knowing the limitations can help investors exploit Real Assets growth potential


Dugald Higgins

Interest in real assets continues to attract attention as more investors take note of their defining characteristics – a smoother set of returns that are lowly correlated with other major asset classes. However, are real assets the safe haven investors believe them to be?

Zenith Investment Partners, in its inaugural sector review of Real Assets, believes that although real assets have a range of attractive attributes, many investors do not fully appreciate the limitations that must be accepted to fully reap the benefits.

While real assets contain a diverse range of market sectors and strategies, their defining characteristic is their tangible nature, with returns typically underwritten by a consistent income stream. Real assets generally comprise private market (unlisted) investments in real estate, infrastructure and natural resources.

Dugald Higgins, Zenith’s Head of Real Assets & Listed Strategies, notes that at face value, advocates of real assets have a compelling argument.

“Aside from the positive attributes of smoother returns and low correlations, real assets possess a range of other positive characteristics; consistency of income at a premium to cash rates, inflation linkages, long duration assets and the value that can be extracted from operational management.”

Higgins notes however, that while real assets are characterised by lower volatility, this can also create a paradox for unwary investors.

“Reducing volatility is not the same as reducing risk. Risk should be viewed as permanent capital loss, not volatility. Structural aspects of real assets such as long investment timeframes, illiquidity and leverage, work to heighten complexities and risk at the individual fund level.”

Higgins also notes that aside from real assets fundamentals, one of their most powerful diversifying attributes is their low correlation to liquid assets. However, a significant driver of this characteristic is low liquidity with fund liquidity generally mirroring that of the underlying assets.

Higgins maintains that investors should not be complacent regarding the efficacy of liquidity mechanisms, which may only operate effectively when markets are stable.

“While sacrificing liquidity can be profitable, liquidity mismatch is inherent for vehicles that offer short-term redemptions while investing in long dated assets,” said Higgins.

The review also highlights that while the positive characteristics of real assets can be compelling, they pose difficulties in real world portfolio implementation.

Higgins stated that “While offering a compelling proposition for those seeking to access physical assets which have many attractive features in a portfolio context, investment decisions must be highly sensitive to illiquidity risk tolerance and structural constraints. As such, it is important for investors to ensure that their portfolios are appropriately constructed to deal with a real asset allocation to ensure optimal outcomes”.

Over the 12 months to 31 October 2019, Zenith’s universe of rated real assets funds returned an average of 10.65% p.a. over five years (net of fees) with an observed volatility of 3.6% p.a.

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