Many real asset strategies offer good relative value in the current environment and should provide investors with resilience, diversification and returns.
Where does one begin trying to neatly summarise the events of 2020 and their impact for real assets? Risk was certainly on the minds of our clients and investment teams as we started the year but, to paraphrase an old boxing analogy, it’s the risks you don’t see that cause the most damage.
At the time, we were already aware through media reports of a mysterious pneumonia outbreak in the Chinese city of Wuhan. But few would have predicted this would quickly morph into a global pandemic, causing devastating loss of life and a sharp economic contraction as measures to control the spread of the disease hit activity.
The impact on investment has been profound. Public markets fell indiscriminately in March and experienced sharp bouts of volatility. The subsequent move en masse into perceived safe havens, such as credit and fixed income, squeezed yields tighter. For institutional investors seeking cashflow-matching characteristics alongside resilient long-term returns, these events have increased the appetite for alternatives to traditional public asset classes, including real assets.
According to Aviva Investors’ Real Assets Study, 49% of insurers expect to increase their allocation to real assets during the period. For pension funds, the corresponding figure is 37%.
This vote of confidence in the sector reflects that, with some notable exceptions, real assets have weathered 2020 reasonably well. Their inherent long-term characteristics, as well the latest wave of monetary easing that will keep interest rates lower for longer, mean that many real asset strategies offer good relative value in the current environment and should provide investors with resilience and returns. The flight to safety might also explain the growing appeal of long income, as well as exposure to both real estate and infrastructure debt.
ESG focus
ESG has continued to climb up the priority list of investors, and the pandemic has sharpened this focus further. Driven by the human impact of Covid-19, the ‘S’ in ESG is now considered at least as important as the ‘E’, when investors consider the impacts of what they invest in.
More than 80% of global investors now believe the pursuit of ESG objectives is no longer at the expense of financial returns, and a similar number say their organisation views itself as having a responsibility to invest more sustainably. It is clear these considerations are increasingly seen as non-negotiable, rather than a nice-to-have option.
Prioritising investments that can have a positive social and environmental impact are ingrained into the psyche of real assets investors today. Whilst these investments can deliver better outcomes for people’s pensions, they can also create jobs in local communities or help to fund regeneration projects in towns and cities. As long-term investors, we need to recognise the impact we can have beyond investment performance.
There is a strong desire among global investors for greater transparency and consistency in terms of the measurement of ESG. With no standard tool adopted around the real assets world, almost half the investors we polled want to be better able to measure performance impacts of ESG.
WFH opportunities
It is no great surprise that Covid-19 has dominated the agendas of investors this year, and that appears to be the case regardless of asset class. With an increase in working from home being perceived as the greatest opportunity for both insurers (57%) and pension funds (53%) over the next 12 months, nearly half of insurers and 37% of pension funds consider fibre and broadband particularly important for their portfolios.
Underneath the growing appetite amongst global investors, there are understandable concerns. Our findings highlighted that regulation is considered the biggest hurdle to real asset allocations for insurers (46%).
Market uncertainty caused by Covid-19, and the volatility that has been a subsequent feature of markets since, should make the resilience of long-term cashflows offered by real assets increasingly appealing to institutional investors. With interest rates likely to remain lower for longer, we expect clients to continue to look towards the sector, not just for risk diversification but for returns too.
Guest commentary by Mark Versey, CIO, Real Assets, at Aviva Investors
