THE GROWTH OF REAL ASSETS – WHY THE SEARCH FOR ALPHA CONTINUES

By Didier Roubinet, chief strategy officer at NeoXam

For several years now, the market has been driven by very low, and even in some cases, negative yields. With this economic backdrop unlikely to change anytime soon, it is hardly surprising to see leading institutional investors and asset managers seeking out alternative investment support in the form of real assets and private equity. After all, fund managers have investors to keep happy, which means they have no choice but to look for new ways to provide long-term returns.

With investments in real assets and private equity strongly increasing over the years, asset servicers and asset managers are currently trying to work out ways to handle these asset classes as part of their global investment portfolios, together with traditional investments. The problem is that this is by no means an easy task.

The challenge is that traditional equity and fixed income investments’ rates of returns have been very weak for a while. As a result, returns are no longer sufficient to produce attractive insurance life rate returns, or to allow public or private pension and sovereign-wealth funds to view the future with confidence. Increasing average lifetime expectancy and decreasing pension contributions of retired employees makes the scale of this problem massive. As a case in point, over one in four European pension funds report negative cash flows. In the U.S, cash flows of defined contribution schemes on the pension market could be negative by 2020.

This is why private equity and real assets investments are seen by the market as a good balance between performance and risk. Not only do they provide attractive yields with long-term capital appreciation and relatively predictable cash flows, but they also ensure growth irrespective of market cycles and macroeconomic volatility, even if capital loss is a real risk. The craze for these asset classes can be explained by the long-term nature and returns over the complete life cycle of these investments which matches well with long-term commitments of pension funds.

Some studies expect this trend to accelerate over the course of the next decade, with allocations to Real Assets reaching 20 to 30% of portfolios by 2030, with some institutional investors allocating upwards of 50% to the asset class. Institutional investors should seek to identify the right combination of assets to ensure an independent, uncorrelated and reliable alpha source, while minimising global risk exposure.

With the low rate/low yield environment looking set to continue for the foreseeable future, there has never been a better time for fund managers to find a way of managing real asset investments. The effect of several asset classes, alternative and traditional, on the global risk exposure is highly complex. This is why the path asset managers choose to go down needs to factor in risk evaluation on the basis of a graded risk assessment – more commonly known as a tiered approach. Asset managers who adopt this approach will ultimately be the ones best placed to provide investors with multi asset classes investment solutions that display a consistent view of portfolio risk and performance.

By Didier Roubinet, chief strategy officer at NeoXam

For several years now, the market has been driven by very low, and even in some cases, negative yields. With this economic backdrop unlikely to change anytime soon, it is hardly surprising to see leading institutional investors and asset managers seeking out alternative investment support in the form of real assets and private equity. After all, fund managers have investors to keep happy, which means they have no choice but to look for new ways to provide long-term returns.

With investments in real assets and private equity strongly increasing over the years, asset servicers and asset managers are currently trying to work out ways to handle these asset classes as part of their global investment portfolios, together with traditional investments. The problem is that this is by no means an easy task.

The challenge is that traditional equity and fixed income investments’ rates of returns have been very weak for a while. As a result, returns are no longer sufficient to produce attractive insurance life rate returns, or to allow public or private pension and sovereign-wealth funds to view the future with confidence. Increasing average lifetime expectancy and decreasing pension contributions of retired employees makes the scale of this problem massive. As a case in point, over one in four European pension funds report negative cash flows. In the U.S, cash flows of defined contribution schemes on the pension market could be negative by 2020.

This is why private equity and real assets investments are seen by the market as a good balance between performance and risk. Not only do they provide attractive yields with long-term capital appreciation and relatively predictable cash flows, but they also ensure growth irrespective of market cycles and macroeconomic volatility, even if capital loss is a real risk. The craze for these asset classes can be explained by the long-term nature and returns over the complete life cycle of these investments which matches well with long-term commitments of pension funds.

Some studies expect this trend to accelerate over the course of the next decade, with allocations to Real Assets reaching 20 to 30% of portfolios by 2030, with some institutional investors allocating upwards of 50% to the asset class. Institutional investors should seek to identify the right combination of assets to ensure an independent, uncorrelated and reliable alpha source, while minimising global risk exposure.

With the low rate/low yield environment looking set to continue for the foreseeable future, there has never been a better time for fund managers to find a way of managing real asset investments. The effect of several asset classes, alternative and traditional, on the global risk exposure is highly complex. This is why the path asset managers choose to go down needs to factor in risk evaluation on the basis of a graded risk assessment – more commonly known as a tiered approach. Asset managers who adopt this approach will ultimately be the ones best placed to provide investors with multi asset classes investment solutions that display a consistent view of portfolio risk and performance.