Money managers make way with real assets

Money managers' efforts promoting real assets are achieving results, with increases in most of the component parts of that category during 2012, according to Pensions & Investments' annual survey of managers of U.S. institutional, tax-exempt assets.

For the year ended Dec. 31, money managers in the survey had a 9.27% rise in real estate equity to $284.2 billion; a 17.7% rise in inflation-protected securities to $124.9 billion; an 11.8% increase in real estate investment trusts to $61.8 billion; a 9.1% jump in commodities — excluding gold — to $30.6 billion; and a bump of 7% for timber to $16.5 billion.

But assets managed in infrastructure are down 10.4% to $6.3 billion, after showing increases every year since P&I started tracking infrastructure assets as of year-end 2006. Infrastructure assets grew 27% in the previous survey.

Meanwhile, growth in the other hot alternative investment category — debt and credit — continues to be uneven. Distressed debt is up a mere 2.2% to $23.7 billion while mezzanine debt is down 9.8% to $6.92 billion. This is the reverse of last year's survey findings in which mezzanine increased by more than a third but distressed debt was down 18%. Privately placed debt was up 13.6%, to $54.5 billion. However, assets invested in collateralized debt obligations were down 22.85% to $10.14 billion and mortgages (whole loans) were down 16.13% to $57.13 billion.

Bank loans grew 37.44% but the data are skewed by the inclusion of two managers that were not on the previous year's list.

The growth story for many of the remaining alternative asset classes also was lumpy. Venture capital assets under management picked up 5.28% to $17.2 billion, after rising by a slender 1.5% in the previous survey, and private equity dropped 7.5% to $43.19 billion.

Energy was basically flat, at $8.9 billion. However, this survey is the first in which P&I asked for a breakout by assets in master limited partnerships, the majority of which are energy related. If the $2.66 billion that managers reported invested in MLPs is included in the energy figure, the increase in energy during 2012 is 28%.

P&I's data on the individual asset classes and strategies are based on assets managed for U.S. institutional tax-exempt investors as of Dec. 31.

Once again, J.P. Morgan Asset Management topped the list of real estate equity managers, with assets growing 14.8% to $26.05 billion.

“We benefited from some nice returns in the marketplace, both income and on the appreciation side,” said Joseph Azelby, managing director at J.P. Morgan Asset Management in New York, where he is head of the firm's global real assets group.

“We also attracted a lot of new capital, particularly in core and to a lesser extent to core-plus and value-added strategies. The flows were very strong,” Mr. Azelby said.

The NCREIF Property index return for the year was 10.5%. The income portion was 5.8% and appreciation contributed 4.5%. The NCREIF Fund index — Open End Diversified Core Equity index returned 9.76% net of fees for calendar 2012.

Second on the list of largest real estate equity managers, Prudential Financial Inc.'s assets under management grew 12.4% to $22.32 billion. Eric Adler, global chief investment officer for Prudential's real estate business, attributes the growth to a combination of property appreciation, new accounts and positive performance.

“There was a more normalized real estate market in the U.S.,” said Mr. Adler, who is based in London.

Adding to its total growth were increases in specialty sectors such as senior housing and mezzanine debt, Mr. Adler said. What's more, performance in the multifamily and self-storage real estate sectors “were highlights” last year.

Ranking third on the list, TIAA-CREF — with $21.57 billion in assets, up 20.9% from the previous year — was also hired by non-U.S. institutional investors for separate accounts to be invested in U.S. real estate, said Tom Garbutt, senior managing director and head of global real estate in the New York office of TIAA-CREF.

The appeal of U.S. properties for global investors is the greater diversification by investing in the “world's most liquid assets” with an added benefit of catching the U.S. economy on the upswing, he said.

For TIAA-CREF, the increase in real estate assets under management — both real estate equity and real estate debt — is part of the firm's strategy to increase real assets, Mr. Garbutt said.

“The whole real asset space is very attractive,” he said.

Indeed, TIAA-CREF is not alone. J.P. Morgan expects more investors will switch from discussing the addition of real assets to implementing those new allocations in the near term.

Already, this is showing up in P&I's numbers. J.P. Morgan topped the list of infrastructure managers, while TIAA-CREF was second. J.P. Morgan's infrastructure assets grew 6% to $2.5 billion. TIAA-CREF had $1.2 billion in infrastructure assets at year-end 2012, the first year the firm reported assets in that category.

Mr. Azelby noted that J.P. Morgan “raised modest amounts of capital in infrastructure” last year, both for investment in Organization for Economic Co-operation and Development countries and some in Asia. J.P. Morgan Asset Management raised a $125 million “sidecar” vehicle to invest in two toll road companies in India. (A sidecar is a fund that invests alongside another fund.)

Infrastructure is a newer asset class than core real estate and investors are starting to invest at the lower end of the risk spectrum there, Mr. Azelby said. “Investors are looking for current income that fixed income no longer provides,” he said, adding that they also get equity-like returns with less volatility and inflation protection.

Even so, the overall drop in infrastructure assets reflected in this year's survey is in line with what investment consultants are seeing among their institutional clients.

“Many investors are interested in infrastructure but they are looking for the right fund structure,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co.

Investors are interested in infrastructure that has very stable, long-term cash flows, he added.

Many investment vehicles are very expensive with private equity structures that “people don't feel fit with the infrastructure characteristics,” Mr. Morrow said.

“They want low-cost, long-term vehicles to match the stable, long-term characteristics they are looking for from the asset class,” he said. “If there were more core infrastructure products available, there would be a market for that.”

Most infrastructure funds available now are targeting value-added and opportunistic strategies, which is not what most investors want from the asset class today, he said.

REIT assets, which some managers say could fit well within a real assets allocation, showed positive growth this year, boosted by double-digit index returns.

Once again, Morgan Stanley and Cohen & Steers were in the first and second slots on the list of the largest REIT managers. Morgan Stanley REIT assets rose 16.6% to $8.3 billion and Cohen & Steers assets grew by 19% to $6.85 billion.

“There's basically been three things that led to the increase: stocks did appreciate, we did win some new mandates and existing investors did add to their accounts,” said Ted Bigman, New York-based managing director at Morgan Stanley Investment Management and head of global real estate securities investing. “But fourth, we did have some investors rebalance and take some money out. Overall, share price appreciation and positive inflows have been partially offset by rebalancing outflows.”

The FTSE NAREIT All-Equity REITs index had a total return of 19.7% for the year ended Dec. 31.

Recently, investors are talking with Morgan Stanley executives about expanding into real assets from listed real estate, Mr. Bigman said.

“Traditionally, they have achieved this (exposure) through direct private investments. More recently, they have broadened their search to include real asset classes that possess these attributes as well as offer liquidity, such as listed real estate, listed infrastructure, and often times in combination with” inflation-protected securities, he said.

Still, investors' emphasis on liquidity since the financial crisis has not provided a permanent boost for REIT managers because of the asset class' volatility, he said.

“I would say for those who started valuing liquidity more, some of those have been turned off by the volatility in the space,” Mr. Bigman said. “You can't get liquidity for free. With liquidity, comes volatility.”

This year's listing of the largest REIT managers illustrates the volatility of listed real estate. Third ranked AEW Capital increased its REIT assets by a whopping 64.6% to $5.6 billion while Invesco Ltd. dropped to sixth position from third with a 37.3% decrease to $3.1 billion.

The debt and loan landscape also is irregular this year. Towers Watson's Mr. Morrow explained that while investors have a strong interest in distressed debt, they are less attracted to mezzanine.

Towers Watson clients are looking for “alpha-type strategies” so they are willing to pay private equity-type fees for manager skill involved in turnarounds in distressed debt strategies, he said. But they see mezzanine as a loan origination strategy for which they expect a beta or market-type return. In mezzanine, investors do not see much “manager value added” and so they are not willing to pay high fees for it, Mr. Morrow said.

While mortgage assets under management are down overall this year, the assets of top ranked Prudential rose nearly 25.7% to $15 billion in 2012.

David Durning, CEO of Prudential Mortgage Co. based in the Chicago office, attributed the growth — a record year for the firm — to high demand for long-term financing.

Not insignificant was Prudential's involvement in the pension risk transfer of the General Motors Co. and Verizon Communications Inc. pension plans, which instantly resulted in more invested in fixed income and commercial mortgages, he said.

“We had a record year in 2012, which upped the appetite for 2013” as the pension transfer created an increased demand for mortgages, he said. n