Five ‘real’ great ways to improve your 2014 portfolio

January 30, 2014 Categories: Investment Strategy

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As my colleague Andrew Pease pointed out in our first blog of the year, 2014: is a year for investing cautiously.

We expect equity returns to be modest and interest rate rises to impair fixed income returns. The question is how to best broaden and diversify your portfolio whilst still generating returns.

I see particular value in the benefits of real assets in this current challenging environment. Real assets offer a broad range of attractive, diversifying opportunities. As ever, investors should be selective on individual strategies, and mindful of timing of some sectors such as European Core Real Estate markets & commodities.

Here are my top five ‘real’ great ways to improve your portfolio in 2014.

  1. More real assets, more global and smarter Private Core Real Estate: Private Core Real Estate prices have been rising in many regions, but we believe these generally represent fair value. Given the weaker outlook for other assets especially for fixed income, it remains a good opportunity to increase allocations. Increasing global allocations can be particularly attractive. A global approach benefits from access to different regional market drivers. Global allocations can thus select from a broader range of opportunities and offer greater diversification benefits. Further enhancements can be sought through smart targeting of the more attractively valued sectors– for example secondary properties in UK. My one caution is on increasing allocations to Continental European Core Real Estate. It currently looks a little early to do this, as we still see risk of price falls in some European markets. However, improving sentiment suggests 2014 may see the final adjustments and thus there could be an attractive entry point later this year.
  2. Opportunistic Real Estate: Opportunistic real estate funds are longer-term vehicles which look to refurbish or develop properties offering higher returns than core real estate. Managers in these strategies have a lot of control and flexibility to add value. Opportunistic managers aim to acquire new properties at a discount to market prices. They can also use capital to improve these buildings and then sell when market prices have risen. We believe that good opportunistic funds raised in 2014 will offer very attractive risk-adjusted returns.
  3. Real Asset Debt: Since 2009, we have seen a broad array of attractive real estate debt opportunities. Whilst the period of “great returns for nearly all strategies” has past, strong managers with selective strategies – in UK, European or Global – can still find attractive deals in both real estate and infrastructure.
  4. Listed Real Assets: I’m a big believer in the diversification benefits of listed real assets. They can benefit liquid equity portfolios and complement unlisted real assets. Attractiveness of listed assets depends on their prices against their prospective valuations. At the start of 2014 our preference is tilted towards Listed Infrastructure over REITS but this can evolve through the year. Against these positives, I’m more cautious on the outlook for commodities. We see potential headwinds in commodity prices from new supply becoming available. As such, I am wary of initiating or extending commodity allocations at the current time.
  5. Get totally real: Investors can also expand their portfolio beyond real estate to include other real assets such as infrastructure, timber, farming and natural resources. We are less keen on real assets that are closely related to commodity prices, for the reasons noted above. However many infrastructure strategies offer the potential for return streams independent of broader markets and commodity prices. These characteristics have led to increased interest in infrastructure and higher prices for larger, less complex investments. The benefits remain, but investors need to be selective to get the best returns. We find attractive opportunities in small/mid size infrastructure projects, in those requiring operational expertise and specific sectors such as North American energy infrastructure or European renewables.

In summary, in 2014, real assets offer a range of attractive opportunities with the potential both to deliver returns and broaden portfolios. I believe that each one of the above approaches can enhance the chances of meeting investors’ portfolio targets. But in combinations of 2, 3, 4 or – best of all – all 5, they can make an even greater contribution.

 

Nick Spencer – Director, Client Strategy & Research

  

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