The investment category known as ‘real assets’ will increase in size and importance in investor portfolios in the next decade, predicts a new research report released by JPMorgan Asset Management. Not only that, but the global financial giant asserts that in the next 10 years real assets—which includes real estate, infrastructure, transport and natural resource assets—will move from an alternative to a mainstream asset class.
According to the report, portfolio allocations from pension funds could rise from the roughly 5 percent to 10 percent where it is today to as much as 25 percent in the next decade. With the exception of some pension funds in Canada and Australia, the adoption of this model is still slow-going.
So far, a small group of institutional North American investors have also tilted their current allocations toward real assets, which now approach 15 percent to 25 percent of their overall funds. Among these LPs with at least 25 percent allocated to real assets include the Dallas Police & Fire Pension System, Ontario Teachers, Austin Police Retirement Fund and Yale University.
JPMorgan Asset Management says that global real assets’ typical performance bridges the gap between fixed income and equity. First, they generate yields that are competitive with other fixed income alternatives. “Their stable bond-like payment structure can serve as a reliable base for stable mid- to long-term total returns by contributing to price appreciation in up markets and offsetting losses when values decline,” says the report.
Second, as a higher yielding, non-bond complement to fixed income, real assets also offer the potential for equity-like upside and the ability to respond positively to healthy, growth-induced inflation. While bonds pay out a regular fixed coupon until they reach maturity, real asset payouts can grow in line with cash flow growth. Global real asset investments also provide geographic diversification and in most cases come with total net return targets that range from competitive—8 percent to 11 percent for core strategies—to compelling—14 percent to 20 percent for more opportunistic strategies.
The report’s authors, JPMorgan Asset Management’s head of global real assets group Joseph Azelby and real estate strategist Michael Hudgins, argue that there are a number of reasons that investing in real assets as a single allocation with multiple sleeves is an optimal approach. For one, although real asset subsectors have similar profiles, they function at differing levels of intensity. So while most offer income as a component of total return, some offer more income as a share of the total return over time, and even those offering similar levels may offer more or less stable income streams.
“Utilising all of the subtypes in any allocation exercise allows investors the flexibility to structure their real asset allocation to meet targets that may lean towards income for one investor, inflation hedging for another and capital appreciation for a third,” the report claims.
As investors currently find themselves questioning whether equities and bonds will deliver risk-adjusted returns that meet expectations, they are increasingly searching out alternatives to bonds and equities. The real assets category is quickly becoming a traditional asset class in which to invest. And a select group of investors is at the vanguard of what JPMorgan believes is a rare structural shift in pension fund/investor allocations to a new mix where real assets will migrate from being an “alternative” to being a “traditional,” playing as critical a role in asset allocation as fixed income and equities. Still, this shift is still in the early stages.