Fixed income assets, in particular bonds, are traditionally popular among income-seeking investors. Their steady recurring income plus attractive yields help to deliver sustainable returns. But with low to negative yields amid a low interest rate environment, bonds no longer offer an attractive level of income. Where can investors seek attractive income generating assets?
JPMorgan Asset Management (JPMAM) believes real assets may offer a viable alternative. Such opportunities can be found in certain segments of the property, infrastructure and transportation industries, it says. The asset management firm reckons real assets are the new bonds.
The asset manager notes that core real assets tend to be characterised by a steady and predictable income stream. These reliable cash flows are underpinned by contractual assets backed by strong counterparties. Moreover, core real assets generally have low levels of volatility and less correlation to public markets, it adds.
Over the next 10 to 15 years, JPMAM expects the average annualised total returns of a diversified portfolio of core real assets to range between 6% to 8%. Of this, about 70% will come from income generating assets.
Kerry Craig, global market strategist at JPMAM, says global core infrastructure assets have a negative correlation to both global bonds and equities. Core real estate assets across Asia Pacific, Europe and the US, too, are negatively correlated to global bonds than they are to global equities, he adds. They are also more negatively correlated to global bonds compared to the negative correlation for private equity and hedge fund strategies, such as equity long/short, relative value and macro.
“So that diversification benefit is very much true [especially in] thinking about how to build in that downside protection to portfolios. And perhaps [real assets provide the opportunity of] overtaking, or at least replacing some of the role of bonds in that portfolio,” Craig says at a recent briefing. “We are thinking about the safer parts of the real asset spectrum.”
He adds that opportunities within the logistics segment of the real estate industry abound in many markets around the world given the rise of e-commerce. The impact of Covid-19, devastating as it is, has only accelerated the shift to online purchases from brick-and-mortar stores.
The small size of online sales relative to total retail sales implies that there is ample room for growth ahead. Craig notes that China’s online retail sales — which far surpasses that of the US — comprised only 16% of total retail sales as at May 31. This compares to the US’s 10%. Meanwhile, Singapore’s online retail sales stood at about 5% of total retail sales.
Yields arising from logistics assets are also attractive. JPMAM says prime warehouses located in China Tier 1 cities and Singapore can generate yields between 5% to 6%. Those located in Auckland and Sydney have yields that are slightly below 5%. “Those yields are pretty attractive when we [compare to] what we can get on government bonds in Australia or in the US in terms of income,” adds Craig.
In the infrastructure space, Craig also points out that this segment of real assets has offered steady income of about 5% to 6% over the last 10 years to 2019. This is despite fluctuating capital appreciation in that period.
Craig also says that the world is estimated to spend about US$3.4 trillion ($4.6 trillion) on infrastructure each year up to 2030. The bulk of such spending would go to the construction of road, power, water and telecom infrastructure. As people spend more time at home owing to Covid-19 restrictions, telecom spending could rise further, he adds.
“Now WiFi and internet in particular are not a utility in many standard definitions. But it is becoming one in my mind,” he says. “It’s how we work now; it’s how we educate our children. And it’s largely how we source entertainment to keep ourselves occupied during these lockdown periods. So, the utilisation [of] WiFi is a particular area to watch in terms of thinking about how this landscape could grow.”
Finally, the transportation sector also presents opportunities, especially assets that are backed by contractual cash flows, says Pulkit Sharma, head of real assets and alternative investment strategy and solutions at JPMAM. He notes that fuel, food and other essential goods still need to be transported despite the Covid-19 restrictions. The key is finding long term contracts with inelastic demand characteristics and high quality counterparties.
