Listed real assets: tactical flexibility

Capitalizing on volatility

Listed real assets can be used to gain immediate access to real assets, adding liquidity to the toolkit while serving as a powerful instrument in tactical and strategic portfolio allocation.

With liquidity comes volatility, as listed real assets are marked-to-market in real-time. Constant pricing and the deep, liquid market equate to more potential opportunities for alpha.

The dispersion in returns across different stocks and sectors has been significant over time. In this constantly evolving world, we expect the likelihood of a gap between winners and losers to remain high.

The structural benefits of listed real assets support a strategic allocation in an investor’s portfolio. For example: attractive yield, tangible real assets, long-term contractual cashflows that are pro-cyclical, and diversification versus bonds and equities to reduce portfolio volatility are among the ways the asset class can help deliver inherent value to investors.

Pent-up out-of-home demand

Having lagged in 2020, listed real assets are attractively priced and levered to the economic recovery. In our opinion, they typically tend to deliver compelling returns early in the business cycle, positioning them well for the recovery.

We believe early recovery stages will be dominated by pent-up out-of-home demand, with cyclical business models performing well. Fundamentals should bounce back in multiple phases and have a significant impact on sectors like hospitality, entertainment, select retail and billboard advertising. We also see individual companies across other sectors being affected in very different ways, providing a fertile environment for active management and alpha generation. Structural trends remain critical, with digitization and demographics as key long-term drivers of returns.

Listed real assets tend to work early in the cycle, so as we enter a new cycle it’s worth looking back at prior cycles. When we do, the data is telling. For instance, when coming out of a recession where the economy grows off a low base before an acceleration, listed real estate has tended to outperform broader equities.

REITS work early in the cycle

REITS vs. equities by phase of the business cycle

As we enter the middle phase of the cycle, with stable growth and a normalization in interest rates, thoughts often shift to the sensitivity of listed real assets to inflation. It’s worth noting here that listed real asset cashflows offer a natural inflation-hedge with the added benefit of protection through the replacement cost mechanism; and in prior cycles, listed real assets have typically outperformed as inflation takes hold.

Real estate as an inflation hedge

REITS vs. equities in different inflationary regimes