Today’s market is being driven by fear. Fear of rising interest rates, fear of volatility, fear of inflation, and fear of slowing global growth. These fears have caused a massive correction in global equities market that has sucked billions out of investor portfolios and put real assets back in the spotlight.
Real assets have been a buzzword for several years but are not a new idea. Real assets are a category of investment that includes real estate, natural resources, commodities, and infrastructure, things that have tangible value based on their intrinsic qualities. The reason real assets have become a buzzword is their strategic value within a portfolio, a value that many investors could benefit from today.
Real assets are known to provide better risk-adjusted returns in volatile markets and come with an element of inflation protection (most times pricing and businesses are regulated by the government and tied to currency). An allocation of real assets within a portfolio will help protect your capital and returns from volatility and inflation until the fear is passed.
The good news is that current conditions are favorable for a number of real asset segments including real estate, infrastructure, natural resources, and commodities. Fear may have the market on the brink of collapse but the reality is much, much different.
The reality is that global growth outlook is still strong, the problem is that it has been shadowed by the threat of US/China trade relations, and those shadows are dissipating. Recent developments on the trade front, along with an expectation the Fed will slow down the pace of interest rate hikes, have the global economy set up to reaccelerate and reaccelerate strongly in 2019.
WhereThe Real Assets Money Is Going
Over the last quarter inflows to real assets has been shifting toward global infrastructure plays. The US healthcare segment has seen the biggest increase in valuation rising more than 12% in the last 90 days. The next biggest gainer is Americas Communications which spans both North and South America and up about 10%. Other segments of note include precious metals, European utilities, Australian rental real estate, Asia-ex Japan infrastructure, and Hong Kong REITs.
Investors with smaller portfolios may wish to focus on a global-focused ETF or closed-end fund instead of trying to pick and choose an individual stock. The Brookfield Real Assets Income Fund is one such although its focus is more on the US than anywhere else.
The Real Assets Income Fund, ticker symbol RA, is geared toward high current-income and is heavily invested in bonds issued by real assets companies, securitized credit (residential and commercial mortgage-backed assets), and real assets securities. At last report, the fund was, across all three asset-classes, invested heavily in real estate and infrastructure.
The Real Assets Income Fund has taken a beating over the past few months due to its exposure to interest rates. Because of it the fund is now trading at the deepest discount to NAV in its history and delivering a yield greater than 12%.
Another choice, also managed by Brookfield, is the Brookfield Global Listed Infrastructure Income Fund which trades under the ticker (INF). This fund too is focused on high current income but with a different investment strategy. This fund is only targeting shares of infrastructure equity companies listed on global stock exchanges and yields close to 9.0% at today’s prices.
The current allocation is nearly 80% US which makes it a US-centric fund but it is diversified across eleven other developed and developing economies including Australia, the UK, China, Australia, Mexico, and Brazil. Holdings are focused on US mid-stream energy companies, MLPs, and renewable energy resources within the US, non-US holdings tend toward toll-roads, water and electric utilities, and airports.
Nuveen’s Real Asset Income and Growth Fund (JRI) is comparable to the Brookfield Real Assets Income Fund in that it is allocated across equities and bonds with a heavy weighting on real estate. This fund also targets the US capital markets and yields about 9.0% at current shares prices near $14.50.
The Cohen&Steers Infrastructure Fund (UTF) is a US-centric closed-end fund allocated across corporate debt and equities. It is allocated more heavily toward utilities but has a sizeable amount of its portfolio focused on energy and industrial plays. It yields about 8.5% at today’s prices.
Macquarie’s Global Infrastructure Total Return Fund (MGU) is another closed-end fund focusing on infrastructure. Like the Brookfield Global Listed Infrastructure Income Fund, it is allocated across a handful of developed and developing markets but is focused firmly on the US and North America. Allocation is heavily weighted to utilities at 60% with the remainder split between industrial and energy infrastructure. This fund yields close to 10% at today’s share prices.
Real Assets, For Real Returns
Whatever your strategy there is a real asset segment and investment vehicle to fit your portfolio needs. The bottom line is that real assets are a powerful tool for investors seeking diversification from traditional stocks and bonds.
If you are looking for risk-adjusted safety, current income, a chance for capital growth, and inflation protection there really isn’t any other choice.