The real assets sector has seen record capital inflow, and for a good reason. The listed equity market has seen unprecedented volatility. As a result of the pandemic economic slowdown, the government and federal reserve have unleashed enormous fiscal and monetary stimulus to support the economy and broader markets.
The record low interest rate environment looks to stay for the foreseeable future, which means real assets will be increasingly attractive in the post covid environment.
What are Real Asset Investments?
Real asset investments cover tangible or physical assets like real estate, commodities or infrastructure. These assets are physical in nature at the most basic level and characterized by consistent, predictable cashflow.
More importantly, as distinct from financial assets like stock and bonds are claims of future cashflow. Ownership of a real asset means you can control the cashflow compared to stocks. For example, you can own 5% of a listed company, but most investors do not have control over the cash flow. Your ownership is a pro-rata share of the company. Likewise, bonds are in most straightforward form just money and a future claim of the money with interest at loan maturity.
When investors refer to real assets in real estate, they mean real estate investments. Real assets in infrastructure are the familiar toll roads, airport or railway lines.
How to Invest in Real Assets? – Real Asset List
The most common form of vehicle investors can gain access to real assets is through equity funds, which owns a portfolio of real estate or infrastructure funds. For example, most investment managers offer unlisted infrastructure funds to invest in or even listed infrastructure funds.
Retail investors can own real assets via owning a rental property or replicate institutions by buying listed REITs or unlisted property funds.
Top 3 Reasons Investors like Real Assets
Some of the key attractiveness include:
- Less volatile returns – Real asset prices don’t change day to day depending on investment sentiment. This creates artificial stability in the portfolio and optically smoother returns. Some investors are attracted to the long-term investment and pick a choice when they realize the investment.
- Stable cash flow – Dividends are a primary form of income for stocks but their contractual cash flow defines real assets either from leases in real estate or concessions in the right to operate a toll road. The stability allows investors to use a higher loan to value loans than otherwise through Mezz loans.
- Inflation-linked cash flow – In addition to dependable cashflow, the cashflow increase year or year is usually linked to inflation or fixed percentages
There are different risk profiles for real estate ranging from core to value add real estate investment styles.
Downside Risks of Investing in Real Asset
Major risks investors should be aware of in the asset class.
Liquidity Risk: Since the assets are not traded, there isn’t a liquid market. It takes time to sell these assets, and if there is a downturn where the asset class is out of favor and there are more sellers than buyers, it will take a prolonged period to exit a position and most likely not at the most favorable price. Liquidity risk is distinct from market risk.
Higher Fees: It is not a coincidence the some of the largest managers of real assets like Macquarie and Blackstone are some of the most profitable investment managers in the world. The likes of Vanguard have driven fees earned on index funds almost down to zero; however the private asset space has so far been immune to disruption from index funds due each asset being different to another and almost impossible to replicate financially.
Hands-on management: While the underlying asset is simple, the operation management requires dedicated asset management. If you own a portfolio of stocks, you have a board of directors in each company that manages the company on your behalf. Suppose a fund owns a portfolio of real estate. In that case, the investment manager will have a dedicated asset management team to monitor and manage the investment, which in turn requires to be compensated appropriately.
Are Commodities Real Assets?
Commodities have always been in an odd position in the sector. While they are easy to own, the most easily investable form has been through futures contracts or ETFs, which own the commodities. Through these structures, owning commodities introduces its own set of risks like roll risk or concentration risk, as we saw in some oil ETFs post covid.
We see owning commodities directly like oil and gold as a subclass of the real asset sector. The key issues we see owning these kinds of assets are that they generate no cash flow and, more importantly, all of the returns after storage costs are based on price increases. It is simply unsustainable for a product to increase price year after year in real terms. Therefore these are more trading products that can be used to take advantage of supply and demand rather than long-term investments.