Real Assets

Consequences of the Crisis

 

If anything, the Global Financial Crisis (GFC) has installed in us the importance of sticking to the fundamentals. This means keeping things simple and remaining focused during the investment process, particularly when times are tough.

This is most certainly true in the case of real (i.e. physical) assets, such as commodities, real estate, agricultural land and machinery.

It is now almost 12 years since the start of the GFC of 2007–2008, which most financial experts consider to have been the worst financial crisis since the Great Depression of the 1930s.

The world is still reeling from its effects, which include political upheaval, low economic growth, and changes in investor behaviour. The crisis unleashed chaos as many saw their jobs disappear, and their investments in the equity market vanish.

However, it did pave the way for a series of financial reforms to ensure that the mistakes that had been made will not be repeated, and it altered the way in which people invest forever.

Dr. Shane Oliver[1], Head of Investment Strategy and Economics and Chief Economist at AMP Capital, says the key lessons for investors to learn from the GFC are that: “there is always a cycle; while each cycle is different, markets are pushed to extremes of valuation and sentiment; high returns come with higher risk”.

He also warns investors that they should be sceptical of financial engineering or over-complex products, and goes on to say they should realise “the importance of proper diversification; and the importance of asset allocation” (2018).

After all, investing isn’t solely about the returns one can achieve; it’s also vital for investors to construct a portfolio with a level of risk that matches their investment goals. In layman’s terms: don’t put too many eggs in the one basket.

 

There is always a cycle; while each cycle is different, markets are pushed to extremes of valuation and sentiment; high returns come with higher risk.

 

A New Dawn

One consequence of the GFC is that an increasing number of investors have been turning their attention to real assets, which can be broadly defined as real estate and infrastructure investments.

Included under the real assets umbrella are residential, industrial, commercial, energy and various other tangible assets. As for investment vehicles that can be used to access such investments, direct and indirect investments and debt and equity, including private equity, can be utilised, as can funds.

According to a joint report from BNY Mellon and the Official Monetary And Financial Institutions Forum (OMFIM) last year[2]: “Accelerating around 2013, investors have increased direct project exposure to real estate and infrastructure assets via equity and debt” (2018).

For some, this has been about investing in a wider range of assets due to increased competition in the markets. For others, it has been down to them looking to invest in new types of assets as components of a real asset investment approach, or as part of a cost management strategy.

 

Solid Performers

 Historically, real assets have tended to be more stable than financial assets, especially during turbulent times. They offer reliable, long-term returns and can provide protection against inflation and fluctuating currencies due to their relatively low correlation with financial assets.

And unlike financial assets such as stock and bonds, which are based on a contractual claim, they have intrinsic value.

Especially now, during this prolonged period of global uncertainty, investors like the potential for steady, predictable income that real assets can provide, as well as the diversification they can bring to their portfolios.

 

One consequence of the GFC is that an increasing number of investors have been turning their attention to real assets...

 

Future Direction

And while the post-GFC phase was marked by diversification towards real assets, more recently investors have been placing greater emphasis on diversification within real assets, to areas such as the property sector and its various sub-divisions.

Alan Flanagan, MD, Global Head of Private Equity and Real Estate Fund Services at BNY Mellon alternative investment services, points out in the BNY Mellon/OMFIM report that: “A convergence of forces is shaping the global infrastructure and real estate markets.” (2018)

The forces he refers to include central bank policies and demographic shifts. Other factors he points to are middle-class growth, urban expansion and the impact of millennials.

“The outperformance of real assets have created a surge of interest and investment from public investors,” (2018) Mr. Flanagan observes.

The implications of this for global markets, financial services providers and investment portfolios are huge, as the investment patterns set by public investors such as pension funds and sovereign wealth funds have a habit of trickling down into the mainstream.

 

 

 

[1] 2018. Dr Shane Oliver, Seven Lessons From The Global Financial Crisis For Investors, AMP Capital, 12 September 2018,

[2] 2018. The Official Monetary and Financial Institutions Forum (OMFIF) and BNY Mellon, Real Momentum: Global Public Investors and the Real Assets Market, OMFIF and BNY Mellon, June 2018.

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