JPMorgan AM urges investors to globalise real asset portfolios

Recent analysis from the asset manager examined the extent to which these investments can continue to provide a stable, inflation-linked income stream in today’s ultra-low yield environment. 

For pension investors, the stable income generated by core real assets provides significant diversification benefits and helps give these assets their bond proxy or alternative safe haven status in low-yield environments. 

However, a report co-authored by Sorca Kelly-Scholte, Emea head of pension solutions and advisory, and Paul Kennedy, head of strategy for real estate Europe at JPMorgan Asset Management, noted that while core real assets provide many benefits to pension funds, there is the potential for price volatility to undermine that safe haven status, particularly in periods of global crisis. 

For instance, core real estate suffered deeply negative capital returns during the global financial crisis of 2007-09.

Furthermore, while real assets have generally held up better than expected in the Covid-19 crisis, the pandemic has caused meaningful impairment to prices (and income) in some sections of the real assets market.

Mature pension funds, in particular, will have limited appetite for volatility as they generally seek to hold low-volatility, low-risk assets to stabilise their overall balance sheets. Fortunately, there are strategies that can help manage both the price and income volatility of real asset allocations.

According to Kelly-Scholte and Kennedy, there are two key ways to manage real asset risks. The first is to “go supercore”, by seeking out higher-quality core assets such as those in better-quality locations or in sectors with more stable demand, and with higher-quality tenants or regulated revenues.

Often supercore assets are associated with longer tenancies or visibility on long-term income. 

Investors can also globalise, diversifying across all real asset regions and segments to reduce the impact of any individual asset, sector or geography on income and price. 

Both approaches have their own advantages, but also come with disadvantages that investors should be aware of. 

Supercore strategies, for example, are relatively simple to implement, can provide higher-quality income, and are able to preserve the link to local inflation in the income stream. However, supercore assets have a lower initial and ongoing yield, and expected long-term returns will be lower. 

Globalised strategies, including global real estate and infrastructure, on the other hand, can reduce income and return volatility, and preserve yield and long-term return potential. However, the link to local inflation in income streams will be diluted, while globalised real asset portfolios can be more complex to implement. 

While both options have pros and cons, the authors point out that the two are not mutually exclusive and advocate for a robust overall investment strategy that combines both approaches in accordance with available capacity and implementation capability.

Kelly-Scholte and Kennedy said: “While there are two routes, our research indicates that going global is the more efficient option and preferable to focusing only on supercore assets. That said, we acknowledge that globalisation of real assets may be more challenging to implement.

“We remain optimistic that adopting a global approach to real estate investment should continue to offer compelling relative returns combined with diversification benefits, a robust long-term inflation hedge, and potential to add value through astute sector and stock selection.”

This article has been amended to reflect that JPMorgan Asset Management analysis advised investors to globalise real asset allocations as an alternative to ‘supercore’ assets.