(January 31, 2014) — As institutional investor appetite for real assets continues to rise, Russell Investments has pieced together its top tips for investing in the asset class.
Concerns about rising inflation and stubbornly low interest rates producing poor bond yields has prompted many investors to revisit real assets, but newcomers to the asset class may feel unsure of the best way to implement them into their existing strategy.
Russell Investments Director Nick Spencer has published his top five ways to get the most out of real estate and infrastructure in investors’ portfolios.
Firstly, he advised that private core real estate are still attractive, especially compared to other fixed income assets, and that it is currently a good opportunity to increase allocations to them, especially if investors employ a global approach.
“Further enhancements can be sought through smart targeting of the more attractively valued sectors—for example secondary properties in UK,” he said.
“My one caution is on increasing allocations to Continental European core real estate. It currently looks a little early to do this, as we still see risk of price falls in some European markets. However, improving sentiment suggests 2014 may see the final adjustments and thus there could be an attractive entry point later this year.”
Secondly, Spencer suggested that opportunistic real estate funds—longer term vehicles which look to refurbish or develop properties—offer more attractive risk-adjusted returns than core real estate, as there’s a real chance of adding value to existing properties and adding new ones at a discount to market prices.
Thirdly, while the heyday for real asset debt may have passed, strong managers in the UK, European, and global space can still find attractive debts for both property and infrastructure, Spencer advised.
Listed real assets present good diversification benefits, he continued, benefitting liquid equity portfolios and complementing unlisted real assets.
“The attractiveness of listed assets depends on their prices against their prospective valuations. At the start of 2014 our preference is tilted towards listed infrastructure over REITS, but this can evolve through the year,” Spencer said.
However, he was more cautious on the outlook for commodities. “We see potential headwinds in commodity prices from new supply becoming available. As such, I am wary of initiating or extending commodity allocations at the current time,” he said.
Finally, Spencer recommended that investors look beyond property, and expand their real asset holdings into infrastructure, timber, farming, and natural resources.
“Many infrastructure strategies offer the potential for return streams independent of broader markets and commodity prices. These characteristics have led to increased interest in infrastructure and higher prices for larger, less complex investments,” said Spencer.
“The benefits remain, but investors need to be selective to get the best returns. We find attractive opportunities in small to mid-size infrastructure projects and in those requiring operational expertise and specific sectors, such as North American energy infrastructure or European renewables.”
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