GLOBAL - Institutional investors will increase their allocations to real estate and infrastructure from 5-10% to 25% within the next decade, according to a new report from JP Morgan Asset Management.
Recent changes in asset allocations have largely involved tactical shifts between bonds and equities, according to the report. But uncertainty, heightened volatility and slower growth had strengthened a structural tilt towards real assets - including real estate, infrastructure and timberland.
"Real assets encompass a wide variety of tangible investments that give investors 'optionality' in a world of uncertainty - the ability, that is, to serve as a stable source of income in weak markets and to participate in the capital appreciation associated with strong markets," the report said.
In addition to a reliable bond-like payment structure, real assets offer equity-like upside with cash flow growth in place of a fixed income. They also offer geographic diversification and "total return targets that range from competitive to compelling", according to authors Joseph Azelby, head of the global real assets group, and real estate strategist Michael Hudgins.
Using tracking data from California Public Employees' Retirement System and the Teacher Retirement System of Texas, the report cited as a precedent the shift towards equities after the 1960s when the pension funds responded to macroeconomic transformation by increasing their equity allocation from at most 20% to an average of 60%.
"In 1970 the irresistible force of capital appreciation overcame the immovable object of regulation," the report said.
Azelby and Hudgins have claimed to have identified "a new asset allocation tipping point" with the potential for $714bn (€527bn) to move into real assets, resulting in currently expensive sectors becoming more so and potential mispricing opportunities in others.
Although the authors acknowledged that only 7% of pension schemes had so far allocated more than 15% of their portfolios to real assets, they argued these formed the vanguard of "a new mix in which global real assets will migrate from being an 'alternative' to being a 'traditional', playing an equally critical role in asset allocation as today's traditionals of fixed income and equities".