September 16, 2019

Real assets expensive but opportunities remain

Amid an expensive market and an uncertain global economy, fund managers are cautioning discipline, though there are opportunities for investors to look outside traditional markets and work on assets.

Quality infrastructure and real estate assets are harder to find in today’s competitive markets, but there are still opportunities for investment managers who are prepared to look outside traditional markets and to work on assets.

The recent NAB Super Evolution conference in Melbourne heard that the move into real assets has gained momentum over the past decade, with 55% of asset managers planning to increase their exposure to the growing asset class, according to one survey by a fund manager. It is driven in part by fewer companies listing on equity markets, which leaves investors needing to turn to private markets to deploy capital, the fund manager said.

Trophy assets in particular are overpriced, with large pools of capital and sovereign wealth funds chasing a limited number of assets.

In such an expensive market and an environment of uncertainty about the global economy, fund managers are cautioning discipline. One said their investment committees are running lots of downside scenarios and recession side when weighing up assets and seeking resilient assets.

“If you were to go anywhere near our investment committee without having an incredibly well thought out downside case and understanding of how this is going to impact in a recession, you’re going to get thrown out the door,” the manager told the panel session, The Hunt for US Real Assets from a Northern Hemisphere Perspective.

The conference heard that some fund managers are staying away from asset auctions, instead preferring to tap into their networks of contacts to acquire assets before they are widely marketed.

Managers need to get their hands dirty

One manager said it was important to “go local” when trying to find assets.

“In order to find good assets, you have to be very, very local. Every asset has its own circumstances and its own characteristics.”

The manager said they seek infrastructure assets which are fundamentally monopolistic and have a long-term asset profile; they look at inflation protection, economic growth and GDP linkages. “If you find these sorts of assets then you can hold them for the long term,” they said, but added they are hard to find as unprecedented amounts of capital move into the infrastructure space and more entrants come into the market.

“The key for us is always that you have to be incredibly open-minded in terms of how you approach geographies, investments and characteristics.”

It was important to understand the local market and get the local politics right when developing infrastructure to ensure community and political support.

In the US the type of capital is starting to become important. A fund manager outlined how they had had to turn down some “very big equity cheques” from some sources because it would have changed the fund from being a “United Nations” fund to one dominated by a particular nation. “For the Australian investor, the good news is you you’re well regarded, well-received,” they said.

Despite the highly competitive market, there are still opportunities, but managers will have to improve the assets they acquire – for example, repositioning a real estate asset or doing an agglomeration strategy on pipelines.

“I wouldn’t just buy a core asset and pay top dollar for it and expect that I can sit on that asset and make a ton of money,” one manager said. “You’ve got to get your hands dirty.”

Opportunities to acquire renewables in Asia

Another manager is staying away from regulated utilities, especially in Europe, because that market is overvalued. Likewise, renewable energy assets, whose prices are being pushed up by investor demand for green assets.

However, there are opportunities to acquire renewables in Asia, where the market is five or six years behind other markets. The rise of Asia is one of the key themes infrastructure investors should be considering, including urbanisation, technology and disruption and intergenerational wealth transfer.

“You can actually take a little bit more risk and look into other places because you believe in the growth of Asia and the urbanisation.”

These trends are also creating opportunities in real estate. Ecommerce is driving demand for warehouses, in particular those closer to where people live as they demand faster deliveries.

Housing is also an attractive investment class for managers who follow the demographics, looking to where their tech hubs are being built. Finally, student housing is a resilient asset because in a downturn more people study.

One manager said there were good opportunities to acquire infrastructure in the US, because the asset class is not well understood. Investment bankers there don’t perceive the nuances of a toll road or a power generator, for instance.

Overall and despite the challenges, infrastructure remains an attractive asset class, offering “very good value” on a relative basis and paying the sorts of yields investors want.

Read a summary of the findings from the NAB Superannuation FX Hedging Survey 2019