Investors’ desire for attractive returns and diversification given the current backdrop is driving higher allocations to real assets and less traditional investment vehicles given the current backdrop, according to Cohen & Steers’ Joseph M. Harvey.
Harvey, chief executive officer of specialist US investment manager Cohen & Steers, said the current asset allocation dilemma investors are facing is acting as a tailwind for the asset classes it invests in.
Diversification allows investors to spread risk and derive returns from a range of uncorrelated asset classes.
However, the current investment backdrop has been characterised by a rising correlation between equities and bonds which has prompted some investors to consider allocation to vehicles with a more modest correlation to the main asset classes.
“We have been seeing asset allocations to our asset class, that has come at the expense of the so-called ‘strict style box’ [consisting of stocks and fixed income]. We’ve had the wind to our back,” said Harvey.
“If you are a pension fund in the US, and you’ve returned in two years 7 or 7.5 per cent, [now] with fixed income markets where they are you just can’t get anything close to that and of course investors are concerned about the drawdown risk in equities. So, there is a significant need for diversification along with returns.”
One example where the team is seeing investors moving beyond a “strict style box”, the pair noted, is with allocation to preferred securities.
These are financial hybrid instruments: a form of equity for issuers that act like bonds by offering a fixed or floating rate income.
Yield by asset class
Source: Cohen & Steers
In a yield-hungry world, where generating income has turned increasingly difficult, Harvey noted investors’ interest in their preferred securities has grown, as these offer some of the highest yields available in the fixed income market.
“Preferred securities have historically had significant yield advantages over other investment grade classes and can enhance income while also reducing portfolio volatility,” he said.
They also work as a diversifier for portfolios, particularly against an investment backdrop where bonds and equities have moved in tandem, as stimulative quantitative easing (QE) measures and low interest rates have impacted asset prices.
Harvey said the late market cycle has seen corporate earnings shrink while companies are trading at the high-end of their range, with the same true of fixed income.
“There is a serious need for asset classes that can deliver attractive returns but also provide diversification to a portfolio,” he explained.
Other real assets – which the company specialises in – such as real estate investment trusts (Reits) and infrastructure also offer diversification benefits.
However, Harvey noted that there are two key ways for investors to participate in these areas – in private and public markets.
Global Allocation to Real Estate Securities Strategies
Source: eVestement
“You can be a better-informed investor when you see what’s happening in both areas and you can shift your strategy to where the best opportunities are,” Harvey noted.
“We look at the amount of capital that is earmarked to go into the private markets and real estate and the number is about $250bn in the US or in infrastructure $150bn.
“And [because of] the returns that can be achieved in the private market – as you may expect because of where we are at in the economic cycle – we think a lot of this capital is going to find its way into the public markets because that is where the best opportunities are.”
He added: “Earlier this year in the US – because of interest rates concerns – Reits were trading at 10 and 15 per cent discounts to their underlying real estate value, so we have seen six or seven companies that are in the various stages of being taken private.”
Because of the large amount of capital available, the team are seeing more dramatic examples of that in the infrastructure space, where there are more complex opportunities in the private market.
“We have seen this dynamic where small-cap infrastructure really will be going to outperform because they have been taken private,” said
“We think that through the listed markets we are offering investors a way to complement their overall program in real asset investing, whether it is real estate or in infrastructure.”
The firm offer three offshore funds: the Cohen & Steers Global Real Estate Securities, Cohen & Steers Global Listed Infrastructure, and Cohen & Steers Global Preferred Securities funds.
With the longest track record, the $84.1m four FE Crown-rated Cohen & Steers SICAV Global Real Estate fund launched in 2006. Since launch it has delivered a 107.82 per cent total return compared with a 72.54 per cent gain for the average fund in the FO Property International sector.
Performance of fund vs sector since launch
Source: FE Analytics
The fund has annual management charge of 0.85 per cent.