Real assets: what are they, and why do they make a compelling investment opportunity?

03 March 2020
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By Chris Greenland, CFA, Fund Manager


Against a backdrop of increasingly volatile equity markets, geopolitical risks and continued economic uncertainty, investors have been looking to alternative asset classes to meet their financial goals. In particular, real assets have enjoyed a surge in popularity – a trend that looks set to continue. So what are real assets? And why do they represent, in our view, a compelling investment opportunity?
 

What is a ‘real asset’?


The best way to think of real assets is that they are physical or tangible investments that have an intrinsic value to society. Examples include:

  • infrastructure, such as schools, roads and hospitals

  • property that generates an income, such as student accommodation, warehousing and private rental housing

  • renewable energy generators, such as wind and solar farms

  • commodities, such as oil and gas

The Sanlam approach to real assets


Different types of real assets behave in distinctive ways, and they won’t all share the characteristics we are looking for when investing on behalf of clients. For us, they are an important way of diversifying risk within a balanced portfolio, so we deliberately focus on those that are defensive in nature. This means we look for assets that can generate stable, predictable cash flows that can increase with inflation. While the nature of the cash flow will differ from asset to asset, they all help to manage risk over the longer term.

We invest in assets that form part of the foundation of a functioning economy. By their very nature they can benefit from, or cater for, economic or demographic changes rather than fall victim to them. Examples include offshore wind farms and water desalination companies.
 

Where are the opportunities?


While the opportunities we seek are long term in nature, there is a degree of alignment with a few of the current investment trends and themes:

1. Population growth

Businesses across the world are investing in real assets that fulfil the needs and requirements of larger populations and more concentrated population densities. The implications of a growing and ageing population are deep and wide ranging. According to the UN, the global population will rise by over 2 billion people over the next 30 years, with most of this growth coming from emerging markets.

The UN also forecasts that, by 2050, one in six people in the world will be over age 65, up from one in 11 in 2019. There are already conspicuous consequences of these population and demographic changes. Issues such as housing shortages, public healthcare spending and public infrastructure give rise to social and economic challenges, some of which investment in real assets can address.

2. Climate change

There’s no question that climate change is rising quickly up the political and economic agenda, and this will result in significant investment opportunities. Take the rate of progress in renewable energy as an example. Thanks to government subsidies, the UK leads the way in offshore wind farms, which is hugely exciting given that wind and solar power are set to collectively generate close to 50% of the world’s electricity supply by 2050. New technologies such as ‘whole wind farm optimisation’ and ‘digital twins’ are reducing fatigue loads, improving output and extending the lives of the assets themselves – all good news for investors.

Large global organisations also want to reduce their carbon footprint and their long-term energy costs. We look for businesses that are investing in new technologies to tap into the need for energy efficiency, and this includes companies that are investing in storage solutions. For example, there’s a growing appetite to provide large offices and buildings with ‘off-grid’ energy, meaning their power is generated and distributed on-site. The future of decentralised energy can reduce generation, transmission and distribution losses from circa 65% to around 15%. It also provides a cleaner, lower-carbon, lower-cost power supply with more security thanks to its independence from the grid. Investing in companies that are at the forefront of such technology could ultimately pay huge dividends.

3. Technology

The pace of technological advancement is being dubbed the fourth industrial revolution. The convergence of virtual reality, augmented reality, the so-called ‘internet of things’ (where billions of devices are connected and controlled from our smartphones) and 5G will mean our homes, workplaces, schools, transport and healthcare could transform in ways that are currently impossible to imagine.

We’re already seeing the impact of this on the real asset sector. The burgeoning demand for online shopping and fast home delivery has meant that large warehouse and distribution centres are essential in today’s retail strategy. Good facilities near major road networks and within striking distance of large populations offer investors the security of longer leases and the potential for positive rental growth.

At the same time, the need for digital storage is growing so quickly that data centres are being built all around the world. These make good investments as it’s not easy to move large data centres, which are best located close to major internet nodes. Centres that are built specifically for a tenant’s needs can command leases in excess of 10 years, providing investors with longer-term, reliable returns.
 

A real alternative


Amid volatile equity markets and paltry yields from bonds, investors have been drawn to alternative investment opportunities. Real assets serve as a diversifier and can provide investors with stable, long-term and inflation-linked cash flows. We’re very excited about the opportunities that are emerging in this sector, and we foresee them playing an increasingly valuable part of client portfolios for years to come.

Important information

Issued and approved by Sanlam Investments. Sanlam Investments is the trading name for our two Financial Conduct Authority (FCA) regulated entities: Sanlam Investments UK Limited (FRN 459237), having its registered office at 24 Monument Street, London, EC3R 8AJ and Sanlam Private Investments (UK) Ltd (FRN 122588) having its registered office at 24 Monument Street, London, EC3R 8AJ.

Past performance is not a guide to future performance.

The opinions are those of the author at the time of publication and are subject to change, without notice, at any time due to changes in market or economic conditions. _SAH0220(142)0520UKInst 

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