Feature – Real assets
At a time when economies are contracting into their sharpest depressions for centuries and markets are bouncing with vola- tility, investors will be on the lookout for safer assets. Real assets, which are anchored in the physical world, such as prop- erty and infrastructure, could provide a haven for pension schemes buffeted by the gales of the Coronavirus crisis. It is a sign of the maturation of the defined contribution (DC) market that real assets are increasingly on schemes’ menu of asset options. Until relatively recently, many DC schemes faced an insuperable obstacle in accessing the asset class: they were simply too small to justify including them in their funds. As schemes grow, however, and their scale increases, it is expected that there will be more of those types of assets being used within DC plans.
Strong and stable
Devotees of these long-term assets like the way they do not have the same volatile reactions as others do, while institutional investors, such as pension schemes, had been showing increasing interest in real assets before the crisis hit, attracted by their inflation-proofing abilities. Yet this is by no means the extent of their attractions. Accord- ing to Justin “Biff” Ourso, director and head of real assets at Nuveen, schemes’ increased interest in the class is driven by a number of factors, including diversification within their port- folios. He says that the income component is also interesting as global rates have continued to stay low to negative in certain markets and that it produces attractive total returns. Chetan Ghosh, chief investment officer at the Centrica Pen- sion Schemes, points out that the linkage to UK inflation is stronger and is the key advantage over equities. “You also don’t tend to suffer as much price volatility as equi- ties; the income you expect to get is much more reliant on the contractual income rather than capital appreciation so you start to plan with more certainty,” Ghosh says. For all of the increased interest in real assets by DC schemes, crises have a way of upsetting the strongest trends. However, Mark Hedges, chief investment officer of Nationwide Pension Fund, suspects the trend towards increased exposure will con- tinue as pension funds will look at how they can generate value that matches their liabilities. But that is not to say that infrastructure comes without risks. Here, Hedges sounds a cautionary note. “What you should always remember is that infrastructure equity has two words to it and it still has equity risk,” he says.
While it may well be that on average equity risk is a lower beta than market beta, and it may be, therefore, less volatile than certain assets, for example, airports, have been marked down more severely and have experienced more volatility than the market in this particular crisis.
44 | portfolio institutional May 2020 | issue 93
What you should always remember is that
infrastructure equity has two words to it and it still has equity risk. Mark Hedges, Nationwide Pension Fund
The Nationwide Pension Fund has exposure to property and infrastructure amounting to around 17% of its fund, with expo- sure split over three parts. It has return-seeking assets, in which it includes infrastructure and core property; long lease property; and ground rent property, which it sees as a matching asset, so it is run in a separate portfolio and within that portfo- lio it has a target of a 10% allocation to real assets. It was marginally increasing its exposure to real assets before the crisis and currently has 8% of the fund in the asset class, but the intention is to increase its exposure through affordable housing. It already has one commitment to such a scheme and is on the hunt for another. The Nationwide Pension Scheme has a little over £1bn in real assets, most of which is in long-lease property. Yet Hedges says that he does not see the long-term strategy changing because of the crisis. “We are long-term investors,” Hedges says, adding: “We might occasionally take tactical decisions but primarily they are about rebalancing the portfolio if it becomes underweight or overweight.” Similarly, Centrica’s pension schemes have exposure to renew- able infrastructure and property. Before Covid it had just over 5% in UK bricks and mortar and almost 5% exposure to domestic renewable infrastructure assets, amounting to around a 10% exposure to the asset class in total. Chetan Ghosh
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