The case for a more diversified real asset portfolio is stronger during this late stage of the market cycle, where increased tensions are observed between desired characteristics such as yield and diversification
Many asset managers have recently built and branded Real Assets units, and are now channelling organisational changes towards product development, including the provision of multi-real-asset strategies
These are the key findings of the latest bfinance implementation insight paper, “Rethinking Real Assets”
13 March 2018 – Strong investor appetite for both traditional and niche real assets continues into 2018, with high demand for infrastructure, real estate, agriculture, timberland, renewable energy and more among bfinance’s asset owner clients. While the post-GFC phase was marked by diversification towards real assets, the recent period has seen greater emphasis on diversification within real assets. This has been encouraged by the increasing popularity of more holistic portfolio design, as opposed to segregated asset classes for real estate and other sectors, among asset owners globally.
As a result, demand for the more niche sectors such as agriculture and timberland has increased substantially during the past three years. Within real estate and infrastructure, what was niche is now mainstream, with infrastructure funds tapping into sectors that would not previously have been included such as energy storage or data centres. In addition, more asset managers are today offering diversified real asset strategies that wrap multiple asset classes into one mandate. The heart of these changes is a mindset that is less focused on labels and prioritises core characteristics, such as inflation sensitivity, diversification from equity and yield. Yet investors should take great care: these characteristics are not hard-wired to real assets. At this late stage in the investment cycle, where increased tensions are observed between target characteristics such as yield and diversification, a diversified real asset portfolio can prove beneficial in theory, but implementation is the critical challenge.
The rise of the real asset portfolio
In recent years, the concept of the ‘real asset,’ tangible asset’ or ‘inflation-sensitive’ portfolio has become increasingly popular within the global asset owner community. Once an approach predominantly used by certain North American and Australian institutional investors, the use of a real assets allocation in portfolio design is now becoming an increasingly widespread global practice, even gaining traction among European and UK pension funds. This trend has been encouraged by the shift towards infrastructure, which can be grouped with real estate to create a bedrock for a portfolio founded on core characteristics rather than labels.
With the late stage of the cycle compressing returns in traditional sectors, tensions are increasing between certain target characteristics such as returns and diversification, and investors creeping towards the value-add end of the spectrum in real estate and infrastructure can become more sensitive to cyclical risks. Diversified real asset portfolios can theoretically outperform in this environment, with recent research demonstrating that they have outperformed standalone infrastructure, real estate or agriculture portfolios at times of low market returns, but only if implemented effectively. Investors and their advisors should remember that the main objective is not to have a resilient real asset portfolio but a resilient total portfolio.
Asset owners are not the only ones shifting towards real asset units. Many asset managers have now established real asset divisions in a bid to take advantage of industry trends. Given the organisational overhauls involved when managers have built, bought or branded these teams, investors should pay close attention to issues such as staff turnover, integration and leadership when evaluating and selecting managers.
Strong investor appetite for niche real assets
The post-global financial crisis (GFC) phase was marked by diversification towards real assets, however later years have seen increased investor appetite for diversification within real assets. bfinance has seen increased demand for agriculture, timberland, renewable energy infrastructure and real asset debt. Attractive traits are available to varying degrees in the different sub-sectors, as illustrated in a detailed table summarising strengths and weaknesses, and so a combination can prove potentially beneficial.
Investors may consider real assets in terms of four quadrants traditionally used for real estate – unlisted and listed, debt and equity. Although some vehemently argue against the inclusion of listed infrastructure and REITS in real asset portfolios (#fakeinfra), bfinance cautions against blanket statements and reminds readers that, while listed real assets can be strongly correlated with equities, certain parts of the unlisted real asset universe are also correlated, while other characteristics should be considered.
Multi real asset strategies
A new theme is currently emerging, wherein increasing numbers of asset managers are developing multi-real-asset capability, delivering several real asset types under one mandate. Diversified real asset mandates may be viewed as the logical next step with both asset owners and asset managers taking a more holistic organisational approach to this sector.
According to manager searches for Diversified Real Asset mandates conducted by bfinance in 2017-18, there are three different structures available for investors to consider, including pooled funds, wrappers of managers’ in-house products and classic fund-of-funds. Each of these structures holds different advantages and disadvantages in terms of cost, alignment of interest and customisation.
Among investors, the single mandate for a range of niche real assets is more popular than the mandate integrating traditional real assets (e.g. real estate and infrastructure), though there is appetite across the spectrum. These mandates have necessitated broad, fresh approaches to the market, with few “off-the-peg” solutions advertised.
Where clients are relatively new to real assets, the team encourages them to start with more traditional property and infrastructure, but with an eye to building potential exposure to other sectors over the long term. For institutions that are highly advanced in their approaches due to a long experience with different genres of real asset investment, including some of the firm’s Australian and Canadian clients, the main priority has been building complementary niche exposures around the traditional strategies. Yet generalisations should always be treated with caution: investors’ needs and expectations from real asset investments vary widely, even for institutions of the same type and size in the same country with an equivalent level of experience.
Peter Hobbs, Managing Director, Private Markets at bfinance, commented: “Today’s investment climate has, in theory, strengthened the case for a more diversified real asset portfolio. The late stage of the cycle has compressed returns in traditional sectors, and also increased the tensions between certain key traits, such as “returns” and “diversification vs. stocks.” With investors creeping towards “value-add” end of the spectrum in infrastructure and real estate, for example, they may also increase sensitivity to cyclical risks. Over the past year, bfinance has observed multiple managers and consultants advocating a diversified real assets approach, for a variety of reasons including product marketing, but many of these arguments overlook the challenges of implementation. It is also critical to remember the main objective: the end investor’s priority should not be to create a resilient real asset bucket but a resilient total portfolio. Diversification is not valuable if its results can be mirrored by adding stocks or bonds to the mix: that’s where inter-asset class diversification should come into play.”
Kathryn Saklatvala, Director of Investment Content at bfinance, commented: “Ten years ago it would have been hard to name a Head of Real Assets at a major asset management firm. Today the role is a common one and the supporting M&A trend continues in force. Meanwhile, integrated real asset portfolios are also increasingly popular among pension funds and other asset owners globally, supporting greater diversification into niche sub-sectors. Yet, with a trend of this magnitude sweeping the industry, the fallout can be complex and challenging. Supposed diversification does not necessarily deliver a more well-diversified portfolio. Supposed real asset investments do not necessarily deliver the desirable characteristics associated with this space. At the end of the day, ‘real assets’ is only a label: what’s inside the tin is what matters.”
Investment Roundtable: Live with Jim Bianco
With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.
- Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
- Identify important intermarket relationships he is watching with respect to Global Equities
- Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.
Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.
Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.
At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.
The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March. As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.
These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.
The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term. A rise in the unemployment rate to 8% or so later this year still looks quite likely.
Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.
Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.
Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.
It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.
All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.
What Investors are Looking for in the Next Fintech
By Shaun Puckrin, Chief Product Officer, Global Processing Services
Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.
Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.
However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.
Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.
Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.
So, what are the four things investors are looking for in the next big fintech?
- A strong, differentiated proposition
The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.
To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.
Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it. What is your moat? Getting this right means a foot in the door with investors.
- A path to profitability or exit
This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.
In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.
Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.
- Strong leadership and core team
Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.
A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.
Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.
- The right partnerships
Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.
From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.
Fintech investment is not dead
After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.
By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.
Employee experience platform Perkbox’s research on 1,296 employees and 300 business leaders reveal 65% think the ‘new way of working’...
Almost half (45%) of Britain’s banking/financial services workforce think their employer could do more when it comes to diversity, according to a...
American Express and Amazon Business Launch Co-branded Credit Cards for Small Businesses in the UK
The co-branded Cards offer flexible benefits and payment optionality by allowing small businesses to decide between earning rewards or adjusting...
Go Global To Expand Your Revenue Stream
By Christian Spaltenstein, Managing Director, AFEX Americas Banking and financial operations have evolved immensely in the past few years. Innovation...
Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild
23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs Similarly, 30% of Britain’s...
What Does the FinCEN File Leak Tell Us?
By Ted Sausen, Subject Matter Expert, NICE Actimize On September 20, 2020, just four days after the Financial Crimes Enforcement...
Investment Roundtable: Live with Jim Bianco
With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and...
By Rupert Thompson, Chief Investment Officer at Kingswood Equity markets had another choppy week, falling for most of it before...
October furlough changes – what you need to know
By Alan Price, employment law expert and CEO of BrightHR The Job Retention Scheme is coming to an end on...
Do we really need banks? Yes, but digital transformation industry-wide is vital
By Charley Cooper is Managing Director at enterprise blockchain firm, R3 The Coronavirus crisis has taught us that we are...