Over 40% of insurers and pension funds want to increase their allocation to real assets over the next year, and almost all of them believe such investments can play a role in recovery from the pandemic, according to an Aviva Investors’ Real Assets Study published in London on Monday (November 3).

The results underline an emergent investment trend amid the pandemic; asset owners believe real assets (also described as alternative or private assets) offer an increasingly essential means to diversify portfolio returns and offset low interest rates and volatile stock markets.

Real estate equity, real estate long income, real estate debt and infrastructure (both debt and equity) all have enjoyed strong supporters in the survey, due to the illiquidity premium and diversification benefits they can command over listed assets. Respondents said they believe select real asset investments could benefit from the increasing need of employees to work from home, the growth of data centres and the legacy of disruption from Covid-19.

In contrast, cash, fixed income and equity and commodities generally received less interest from asset owners, according to the study.

Mark Versey

“Cashflow-matching continues to be the key criteria for insurers and pension funds around the world, as these investors increasingly recognise the resilience that real assets can offer their portfolios,” Mark Versey, chief investment officer for real assets at Aviva Investors, noted in the study. 

“This is being seen not only through consistent – and often inflation-linked – cashflows, but also via enhanced yields relative to more traditional asset classes and lower volatility.”

Source: Aviva Investors

The survey was conducted in July and collected views from 1,067 asset owners (532 insurers and 535 pension funds) who represent a total of €2 trillion ($2.33 trillion) assets under management globally. Of these, 218 decision makers (20.4%) are based in Asia.

A separate report published by Broadridge on Tuesday (November 3) underlined the appeal of real assets, noting that regional asset owners could double their overseas (non-domestic) alternative assets from $343 billion in 2019 to $673 billion by 2024.

There is plenty of evidence of Asian asset owners allocating more towards real asset investments. Korea’s National Pension Service (NPS), for example, partnered with APG Asset Management (APG) of the Netherlands in late October to make large infrastructure and real estate projects. Ronald Wuijster, chairman of APG, told AsianInvestor that the two investors are specifically looking for mega deals, typically $1 billion or bigger.

Aviva Investors executives did not reply to AsianInvestor questions.

FINANCIAL INSTABILITY CONCERNS

According to the Aviva survey, real assets are proving most popular among Asia’s insurers. They focus on cashflow matching, capital growth potential and capital preservation when considering investment targets. A total of 77% of insurance companies and 64% pension funds in Asia said that “cashflow matching” is important during consideration.

The top concerns of asset owners have also changed. In Aviva’s survey last year, respondents pointed to politics as their major concern, in large part due to escalating US-China trade tensions and the quagmire of Brexit. This year financial instability has become their top worry, followed by increasing unemployment, supply chain disruption and evolving consumer patterns. All these factors can be directly traced to the impact of Covid-19 on economies.

Nearly 44% surveyed decision makers believe financial instability is a major concern for real asset investments over the next 12 months. European asset owners worried the least (39%) while North America ones worried the most (53%). Asian asset owners stayed in the average.

SUSTAINABLE TRANSPORT APPETITE

Darryl Murphy

In terms of favoured industries, Asian respondents said they particularly want sustainable transport, social housing and healthcare to be key social infrastructure assets in their portfolios. Darryl Murphy, Aviva Investors’ managing director for infrastructure, highlighted in the study that Covid-19 has demonstrated that infrastructure is a resilient asset class.

Increasingly, asset owners are also seeing the importance of including socially responsible assets into their portfolios – in part due to the ongoing development of environmental, social and governance (ESG)-friendly strategies.

Almost 70% of Asia insurer respondents said energy-efficient real estate assets are important, and nearly 45% of regional pension funds shared the same view. Globally, more than 80% surveyed asset owners say their organisation views itself as having a responsibility to invest more sustainably.

Source: Aviva Investors