Real assets can provide a variety of risk and return profiles to meet different institutional investor goals. the ability to determine different levels of exposure for each subasset class — from real estate to currencies to commodities and precious metals — makes a real asset allocation a nimble option for an overall asset allocation. A close look at two of those subasset classes, infrastructure and gold, exemplifies how investments seen as on opposite ends of the real assets spectrum can be part of one allocation. In this roundtable Q&A, Pensions & Investments discussed these issues and more with Jared Gross, head of institutional portfolio strategy, J.P. Morgan Asset Management; John Tanyeri, head of infrastructure/project finance, MetLife Investment Management; and Joseph (Joe) Cavatoni, head of Americas, global sales and ETFs, World Gold Council.
Pensions & Investments: What role does real assets serve as a single asset class?
Jared Gross: You have to recognize that there’s a broad range of investment categories that can be folded into the term “real assets.” You can go from the more liquid end of the market: TIPS, commodities, currencies — particularly emerging market currencies with a high degree of commodity export exposure — gold, and even REITs, though they tend to have a lot of equity risk exposure in them. Then, as you get into the less liquid end of the spectrum, there are sectors like real estate, transportation and infrastructure.
Conceptually, I would segment real assets into two broad categories. You can think of one category as strategies used in a portfolio to serve as a liquid market hedge against rising prices; that would be kind of the first few that I mentioned such as TIPS or gold. In a second category, you’ve got real assets that provide long-term exposure to high quality asset-backed cash flows that have the potential to reset higher as prices and inflation rise. Generally speaking, few investors need to directly hedge inflation in the short term. Longer term, there’s a need for portfolios to maintain value and outperform inflation over a long horizon. And I think that opens up the opportunity set to a lot of the less liquid real asset categories.
John Tanyeri: When we look at private assets we’re traditionally thinking about private corporates and private infrastructure investments as well as real estate, which is comprised of commercial loans, residential loans and real estate equity. In regard to infrastructure, we’re talking about investment-grade assets that typically have some compelling economics in that there’s a historical spread premium over comparable public corporate bonds, yielding incremental income. In addition, infrastructure assets usually exhibit historically lower credit losses vs. those comparable public bonds.
From an asset-liability management perspective, this asset class can help companies immunize their long-term liabilities, given that maturities can range anywhere from 10 to 30 years, and you can structure it as either amortizing or bullet in nature, fixed or floating. Also, the asset class provides a fair amount of diversification by currency, region and sector.
Joe Cavatoni: Going back to where Jared started us off, with cash flows, annuity streams and expected return profiles, clearly gold does not fit into that category for one main reason: It’s no one’s credit risk. It’s actually a real asset that preserves its value, and price appreciation is how you will achieve the return profile. When we consult with institutions about adding gold to their portfolios, the discussion often centers on gold’s strategic drivers — market risk and uncertainty and economic expansion, which are the factors most likely to move gold in the long term and influence price appreciation.
More broadly, the characteristics of gold are returns, the right type of correlations and liquidity that’s global in nature and very deep in the market. And that all culminates in a long-term portfolio impact that improves portfolio performance. Significant state-level pension plans are increasingly embracing gold, averaging around a 3½% to 5% portfolio allocation.
