The search for yield has driven more institutions to seek unlisted real assets, particularly investors that can handle the asset class’s illiquidity, said panellists at the AsianInvestor Asian Investment Summit this week in Hong Kong.
Competition to acquire physical infrastructure is at a high, as institutions are seeking “yield in a world where yield is scarce”, says Sam Sicilia, chief investment officer at Hostplus, an Australian superannuation fund with A$14 billion ($13 billion) in AUM.
Infrastructure assets such as utilities and airports are being used by investors to provide an inflation hedge and portfolio diversification.
“It also provides you with a form of downside protection,” says Sicilia. “Imagine how bad the world needs to get before [a] society decides to switch of electricity generation and transmission, or shuts down airports. Investing in those assets over the long term seems to make a lot of sense.”
Simon Hopkins, chief executive of Milltrust International Group, an emerging markets investment platform, notes that some investors seek real assets that generate income and appreciate in value over the holding period.
For instance, agribusinesses, farms, airports and toll roads are mature businesses which provide recurrent income, says Hopkins. "They are hedged against sovereign defaults, against currency depreciation and against inflation."
He is particularly keen on agriculture, which he predicts will be “one of the best performing asset classes over the course of the next 10 years”.
Post-crisis, banks that had provided leverage for agricultural land deals either withdrew from the market or demanded higher margins or equity, leading to the forced sale of assets.
“There have been very serious dislocations in the pricing mechanism,” says Hopkins. As a result, such assets should provide “excellent returns” from cash yields on the agriculture business and also rises in capital value on the overall asset.
A number of pensions, such as Holland's ABP and US-based TIAA–CREF, specifically seek out agriculture assets, notes Hopkins. They make investments with a view of holding them for as long as 30 years.
However, there remains a segment of investors unable to take on the illiquidity of physical real assets and a shorter investment timeframe, says Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices. “They’re looking for alternatives to equities but without giving up all the liquidity that they get with equities.”
Investing in commodities through major indices or the futures markets provides “an equity-like risk and return profile, with low correlation to equities”, says Gunzberg.“ You might not get the premiums that you get in the private market, but not everyone can take that [illiquidity] risk.”