A London-headquartered specialist consultant, bFinance, has prepared a report on the trends that have emerged over the last decade in the way both investors and managers think about the real assets in portfolios.
There are, the paper says, three trends at work. First, investors are becoming both more sophisticated and more granular in the way they approach two classes of real asset in particular: real estate and infrastructure. This means that managers have to be on their toes, because investors are better informed and more prone to worry about style drift and related issues.
Second, high valuations in this space have pressed many managers in the field to diversify into ever more specialized niches, although “‘uncharted territory’ is ever-more elusive.”
Third, and quite recently, there has been an emergence of multi-real-asset investment strategies. These strategies are marketed with the argument that diversified real asset portfolios outperform either real estate or infrastructure the down parts of the business cycle. The bFinance paper concedes that this is “correct in theory” but adds that “implementation … represents the critical challenge.”
How the Function Evolves
A big shift has been underway in the asset management industry, to such an extent that firms that see themselves as weak in the real asset domain are rapidly moving to correct that fault. The bFinance paper mentions in this connection CBRE’s acquisition of Caledon last June. CBRE is a California headquartered investment firm with a real estate focus, and clients in more than 100 countries. Caledon was a Toronto based firm specializing in private equity and private infrastructure investments. Caledon continues to operate as a separate business unit, CBRE Caledon Capital Management.
The paper also references Hamilton Lane’s purchase of RAPM. Hamilton Lane is a publicly listed (NASDAQ) alternatives management firm. It bought RAPM, a private asset manager in Oregon exclusively invested in real assets, in a deal announced in June 2017, a deal with the explicit goal of building up Hamilton Lane’s own real assets team.
Bfinance says that “given the recent organizational overhauls involved, investors should pay close attention to how the real assets function at a prospective manager has evolved,” because when the constituents of a real assets group have been “brought together, [whether by merger or by acquisition] they can face significant challenges in overcoming previous silos, developing a strong single leadership and working together on integrated products.”
Among U.S. endowments, it has long seemed natural to combine real estate, natural resources, and Treasury inflation protected securities (TIPS) in a portfolio.
Canadian and Australian institutions have long been leaders in infrastructure investment, and they also often have real estate units.
In Europe, though, the whole field has yet to mature. Relatedly, Master Limited Partnerships (MLPs), traditional in the U.S. for energy related investing, do not have an international equivalent.
The global financial crisis a decade ago pushed a lot of individuals, family offices, and institutions in the direction of real assets, that is, contractual claims to physical assets, as a form of diversification after a world in which financial assets, such a credit default swaps, seemed increasingly abstract. The crisis then, created a demand for asset managers who had a feel for that space. What has followed, though, has been the development of first both specializations and diversification within the realm of real assets.
Even within the sub-realms of real estate and infrastructure there has been this dynamic of specialization and diversification, so that what was once a niche (like energy storage or data centers as infrastructure or a long leased sector in real estate) have become mainstream.
The paper includes as a sidebar three paragraphs of thoughts from Peter Hobbs, bFinance’s managing director of private markets. He says that agriculture and timber are examples of asset classes where available strategies “span a broad range of risk/return profiles.”
Hobbs also cites a recent paper from Cohen and Steers, about the “benefits of real assets diversification in defined contributions plans.” That paper made the argument for diversified real asset portfolios. But Hobbs adds that such an argument should be “handled with care.”
The main objective, after all, is not “a resilient real asset bucket” but a resilient total portfolio. If any investor acts so as to prefer the former over the latter, that is a demonstration of “poor institutional governance.”