As an investor, pensions-saver, financial advisor, portfolio manager etc., there has traditionally been two categories of investments (asset classes) that one had to relate to: Fixed income and equities. Some would include cash and more sophisticated investors/advisors would mention alternative investments as a third leg in a portfolio.
We live in a world with uncertainty, huge swings in the equity prices (volatility), historically low interest rates – for some of us – and where muted growth prospects are the order of the day. Lately these facts have given cause for questioning if investing in equities and fixed income can deliver the necessary return to cover the pension funds long term obligations. The same question can be raised with regards to other investor’s expectations of a positive inflation-adjusted return over time.
When an investor visits his bank or even a so-called ”independent advisor” it is rare that alternative investments or ”real assets” are seriously discussed as an element in the portfolio – small or large. Real assets include real estate, infrastructure, alternative energy, forest, commodities, farmland, water etc. and is characterized by being ”hard assets” that typically have a number of advantageous qualities such as a stable return, equity-like upside potential in tandem with the economic development, inflation-proof with a lower volatility and last but not least a low correlation to other asset classes. However one negative characteristic can be a relatively long investment period since these types of assets normally are rather illiquid.
In the search for yield, real estate and infrastructure are attracting significant attention from investors, including pension funds, who are interested in predictable long-term cash flows to match the nature of their liabilities.
J.P. Morgan, the investment bank, states in newly published report that real assets during the next decade to a much larger extent will be accepted as an important third leg in any portfolio and will eventually count for up to 25 per cent of a given portfolio. A historic structural change of the investment universe is in other words predicted, where real assets moves from being ”alternative” to being ”traditional”.
Pension funds and certain professional investors are already working actively with this superior asset class, whereas bad investments have been queuing up in the last couple of years for private investors who – together with their advisors – have been frightened by anything that does not “smell of equities or fixed income”.
This is a great shame, because without making up one’s mind about, and actively study the market for real assets, there is a risk that one misses out on an important source as a supplement to the present investment climate that can hardly follow the inflation.
But it requires that many advisors change their attitude, get educated and invest the time necessary to study and find the right products. Further to educate the investors in the intricacies of real assets. All of it with real intensions.
