Real assets such as infrastructure, transport and real estate, all of which have a low correlation to equities and bonds, should provide useful diversification and inflation protection in a world of rising prices according to Phillip Waller, portfolio manager of JPMorgan Global Core Real Assets.
UK inflation measured by the consumer prices index (CPI) rose to 2.5 per cent in June from 2.1 per cent in May, further exceeding market expectations and the Bank of England’s long-term target rate of 2 per cent.
Inflation can eat away at investors' returns, with cash, bonds and growth stocks on high valuations particularly susceptible.
Now may be the time for investors to add some alternatives to their portfolio if the recent spike in inflation becomes a longer-term issue, eschewing the assets that have served them well over the past decade.
But not all alternatives are created equal. Waller said those in need of inflation protection should look for income-orientated assets within transport, real estate and infrastructure.
These three areas provide resilient income, but importantly give investors another layer of protection as each asset is different from the other as well as traditional assets such as stocks and bonds.
“When you have them in a thoughtful way within a portfolio you can provide better outcomes by having that double-layer of diversification,” said Waller.
This has worked in the past. Real assets performed well during the inflationary 1970s, as both real estate and infrastructure outperformed the S&P 500, although previous periods of inflation, while useful as a guide, should not be used as a direct comparison until its clear how transitory this bout of inflation is, he warned.
Waller said both of these assets should similarly benefit in another period of higher inflation, but especially real estate as rental yields increase to keep pace with inflation.
At 40 per cent, global private real estate makes up the biggest proportion of the portfolio. A further 20 per cent is in private infrastructure and another 20 per cent in transportation. The final 20 per cent is in listed real asset securities – which gives the trust some liquidity when required.
Geographically, the manager is keeping a particular eye on the US infrastructure story, as 50 per cent of the portfolio is in North American real assets. Joe Biden has been vocal in his support for higher infrastructure spending, including a £2.9tn Green New Deal to boost renewable energy in the country.
This has been a key theme in the portfolio for many years and Waller said he did not see this changing, although warned that the new US cash injection may not be as significant as some expect.
“The focus on renewable energy was there before within real asset markets,” he said. “The pandemic has accelerated and made these things more obvious but hasn’t created any new trends.”
A further 30 per cent is in Asia Pacific and the alternative investment specialist said this market was attractive given its good growth demographics and economies that have dealt well with the pandemic.
“The trends don’t change in Asia versus elsewhere,” he said. “Increasing industrial allocations, residential focus and an evolving office market - these are all global themes very much playing out in Asia as well.”
A further 16 per cent is held in Europe while just 3 per cent in the UK, but the manager said he was not negative on the UK market.
“It’s understanding what our clients already have a lot of exposure to and providing a global complement to that,” he said.
Performance of fund vs sector since launch
Source: FE Analytics
The trust launched in September 2019 and has made a slow start to its life, making a loss of 2.9 per cent, compared to a 12.1 per cent gain for the average trust in the IT Flexible Investment sector.
“Our chairman was quoted as saying it was a bit of a baptism of fire in terms of the timing,” said Waller. “The big impact for us was that it took longer to put the money to work than we initially thought. There just wasn’t the visibility we needed to allocate capital.”
Now however, the trust is fully invested, with more than £100m of assets purchased since November 2020.
“We’ve been able to hit our income targets throughout,” he added. “Even with that delay and the pandemic disruption, income has remained resilient and that bodes well for the future as we’ve been able to do it in one of the most difficult periods.”
According to the Association of Investment Companies (AIC) the £194.2m trust is trading at a 5.2 per cent premium to its net asset value, has a yield of 4.3 per cent and is not currently geared.