Core alternative real assets have half the volatility of public equities and pay up to three times the income of quality investment grade bonds, according to Pulkit Sharma, head of real assets and alternative investment strategy and solutions at JP Morgan Asset Management (AM).
Investor interest in private market alternatives has risen as a result of low-to-negative bond yields, GDP contracting worldwide, elevated volatility in financial markets, rising unemployment and some signs of bond defaults.
“All of these macro factors play a role in using alternatives in a portfolio to generate income or enhance returns,” Sharma told a virtual media briefing in Hong Kong on Tuesday.
“The reality is that core alternatives are the ‘new bonds’. The income available from traditional core bonds is shrinking and we’re seeing negative real yields in the higher quality fixed income space,” he said.
JP Morgan AM estimates annual net returns of 6-8% from core real assets, with 70% of the yield generated by income.
The firm defines “core” real assets as properties that require little active management, and can be relied upon to payout stable, predictable income with low risk.
Their cash flows tend to be underpinned by contractual assets backed by strong counterparties, with a generally low level of volatility and less correlation to public markets.
“It helps to think of alternatives in categories, such as fixed income-like alternatives or equity-like alternatives or hybrids,” said Sharma.
“If we look at the role that core real assets tend to play in portfolios, they are hybrids, with bond-like contractual cash flows and upside potential through cash flow growth, yet through diversification, they don’t add equity risk,” he said.
Although property is an asset class in transition, it will emerge stronger from Covid-19, Sharma believes.
Among the sub-categories within the sector, he believes that multi-family (apartment buildings) are experiencing strong demand, low vacancies and high rental collection rates given “working from home” (WFH) arrangements. Industrial properties, such as logistics and warehouses, are benefiting from the migration to e-commerce, and the office sector impact is mixed as companies adjust to meet the needs of the WFH regime.
Supportive infrastructure
Kerry Craig, global market strategist at JP Morgan AM, highlighted logistics firms responsible for supporting the e-commerce retail sector through storage facilities, with warehouses providing reliable rental income.
“The post-Covid shift to online shopping and consumption is benefiting the prime warehouse and logistics property sector, accelerating a trend already in place,” he said.
Meanwhile, “broad infrastructure”, such as power, water and telecom utilities, are a “reassuringly dull source of income”, that will be boosted by about $4trn of annual investment worldwide.
“Core global infrastructure returns continue to offer steady long-term contractual cash flows, translating into regular income stream,” said Craig.
“In fact, steady income is a key contributor to the total returns from infrastructure assets,” he added.
The common feature for all alternative real assets is ESG, which is indispensable to alternatives, where the impact on physical assets and communities is tangible, according to Shawn Khazzam, APAC head of alternatives solutions at JP Morgan AM.
“ESG has evolved from being primarily a risk management tool to being heavily integrated into alternatives investment decision making,” he said.
While the governance aspect in managing hard assets has always been “critical”, in times of crisis such as the Covid-19 pandemic, “it is especially important to pay attention to the social factor, by engaging with stakeholders, ensuring the health and safety of the business, as well as assessing how companies treat their employees,” he said.
Source: JP Morgan Asset Management, 31 May 2020
