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Global Real Assets – a new asset class is forming
An asset class borne out of globalisation
So why the attention on real assets now? The potency of real assets lies in their direct links with the twin phenomena of urbanisation and globalisation. The astounding rate of urban development in emerging markets such as China and India is placing huge demands on the world’s resources and infrastructure. Oil, iron ore, copper and staple foodstuffs have already seen massive price rises over the last five to 10 years. Yet faced with statistics such as the fact that China’s middle classes are increasing by almost the size of California’s population every year, we believe that competition for the world’s resources can only intensify even further. The only certain way to hedge effectively against the inflationary pressures these demands might create, is to gain exposure to the assets in demand. But this isn’t simply an emerging market story. The developing world’s hunger for new roads, bridges, airports and hospitals is well documented – but western markets have equally urgent infrastructure needs. An estimated US$16 trillion is required to modernise and expand water, electricity and transportation systems in the US, Canada and Western Europe over the next 25 years (source: Booz Allen Hamilton, Strategy + Business, issue 46, Spring 2007). Over the same period, OECD countries are expected to spend $500-600bn annually on electricity, road, rail and water (source: OECD Study 2006). This level of investment cannot be achieved without the private sector. Private infrastructure investments have increased threefold over the past two years, from US$40 billion in 2006 to US$120 billion in 2008 (source: Standard & Poor’s). There is a concern that there is already too much money chasing too few quality assets – but we disagree. The opportunity set for infrastructure is huge compared to the level of investment to date (a lot of which has been driven by the strong movement from public financing to public-private partnerships). Moreover, while capital inflows into infrastructure have been strong, the quality and stability of infrastructure assets and cashflows remain deeply underpriced by our measures. The potential rewards for early movers into this asset class remain substantial. Until now, assets such as commodities, energy and real estate have tended to be grouped with other non-core investments like private equity and hedge funds under the banner of ‘alternative assets’. Treated as an adjunct to the core equity/bond portfolio, these assets have typically received an investment allocation of 10% or less. However, as the features that characterise real assets (inflation protection, strong cashflows, low correlation) become more highly prized by investors, we believe they will become a more dominant feature of the investment landscape and treated as their own discrete asset class. Over the next decade, we anticipate average exposure to real assets rising to 25% of the typical institutional portfolio, primarily funded by money coming out of equities and bonds.
Real assets in a pension portfolio
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