‘No precedent’ for rise of real assets

Institutions will increasingly divert money into real assets and away from equities and bonds, according to research from Aquila Capital.

“A unique investment landscape” is described by Aquila Capital in a new paper entitled “Real Assets – The New Mainstream”.

The paper predicts that institutions will increasingly divert capital into real assets as equities and bonds fail to deliver their target returns.

With global deleveraging suppressing economic growth and interest rates, the paper predicts that the Dow Jones Index will deliver average total returns of just 4 percent per annum over the next 10 years based on the Shiller Price/Earnings Ratio and 114 years of data.

Meanwhile, German 10-year government bonds are set to deliver negative real returns even in the event that rock-bottom interest rates climb up to 4 percent by 2024.

Oldrik Verloop, co-head of hydropower at Aquila Capital, speaks of a “unique investment landscape for which there is no precedent in history”.

This landscape, he adds, “is giving rise to considerable challenges for pension fund managers struggling to fund deficits. Among these challenges is the need to assess the impact of today’s loose monetary policies on global interest rates and inflation tomorrow”.

He continues: “The quest for new investment solutions by institutional investors seeking to future-proof their portfolios will spark a prominent allocation shift towards real assets, which will become an indispensable necessity in a diversified portfolio.”

The paper describes real assets as “uniquely positioned” to provide value and risk-adjusted returns in a range of different market environments. Characteristics of real assets investments can include strong, inflation-protected income with high investment security, manageable risk and a limited correlation with traditional investment classes.

“Extensive” opportunities for investment in real assets are predicted by the paper as economic growth picks up and populations expand, fuelling the demand for commodities. Concerns over global warming and increasing global demand for electricity are expected to result in further growth for regenerative energy sources.

Furthermore, given a big rise in the global population, significant investment may be expected in farmland.

The paper found that 60 percent of institutional investors in Europe expect institutional allocations to real assets to increase over the next three years. In addition, 41 percent were positive on the investment outlook for real assets compared with 10 percent who were negative.

Aquila Capital is an alternative investment firm based in Hamburg which manages real assets, financial and private markets strategies and has €7.6 billion under management on behalf of investors.