Pension fund investors told which asset classes to exploit

May 04, 2018
IR teams put on targeting alert

The recent CAMRADATA investment conference for pension funds, held in London, explored asset classes that pension fund managers should be investing in – which has major targeting appeal for IR professionals in the relevant areas: real assets, real estate, opportunities in the Asian markets and late-cycle opportunities. 

On the case for real assets, Vince Childers, senior vice president and portfolio manager at Cohen & Steers, discussed how listed real assets can potentially combat today’s investment challenges. He also highlighted that many investors are focusing on alternatives to diversify beyond traditional equities and fixed income. Despite the wide range of real-asset exposures available, investors have tended to focus on just one or two categories, most commonly real estate and infrastructure. But, said Childers, this approach has its drawbacks.

He emphasized the case for blending real assets to smooth out the volatility of individual assets. Also, by focusing only on real estate and/or infrastructure, investors stand to miss out on the prospective complementary attributes of natural resources and the so-called commodities complex.

‘By treating real assets as an asset class and establishing a diversified exposure to all four core categories of real assets – global real estate, commodities, natural resource equities and global infrastructure – investors stand to benefit from the full potential this asset class has to offer,’ Childers said.

Real asset investment manager Cohen & Steers’ analysis of nearly half a century of data shows that an equal-weighted blend of the four core real assets exhibited three valuable characteristics: diversification, inflation sensitivity and return potential.

On property, Ian Mason, director and portfolio manager of the Real Return Fund at AEW UK Investment, suggested that pension funds seeking cash flow matching strategies could do a lot worse than consider real estate income. ‘Property is a very simple asset class,’ he said. ‘If you focus on property fundamentals and buy quality buildings in areas where there is strong occupier demand, then if the market rent goes up, the value goes up.’

Asia

On the rise of the Asian consumer and related opportunities, Natalia Mu, client portfolio manager at Mirae Asset Global Investments, noted the opportunities in Asia and described the rise of the Asian consumer as the most important opportunity in the region over the next few decades. She highlighted that the main factors encouraging the long-term consumption trend in Asia are demographics, wage growth and government policy. 

China is the key growth driver in the region and government policy is under way for transforming the economy to be more consumption-led. ‘The Asian consumer opportunity is wide-ranging and the best way to capture and benefit from this theme involves identifying the nascent developments early on,’ Mu explained. ‘To do this well, it is important to have a presence in the local market.’

Asked about the risks facing the Asia consumer market over the next six to 12 months, Mu responded: ‘Our overall outlook is fairly positive as fundamentals continue to show signs of further strengthening. Underlying demand in major markets, such as China and India, appear resilient.

‘The main risks would be related to a meaningful deterioration in the current global macro environment such as excessive government/central bank tightening and global geopolitical risks. Given this, we expect 2018 will be a more volatile year – [but] we believe the impact on company earnings should be limited for the consumption theme.’

On so-called late-cycle opportunities, Dan Roberts, executive managing director and head of the global fixed-income group at MacKay Shields, and Steve Cianci, senior managing director at the same firm, highlighted that the US was the first to emerge from the financial crisis and, subsequently, has experienced the longest expansion among major industrial countries. As such, Roberts and Cianci said the US economy is showing signs that are usual toward the latter stages of a normal economic cycle.

MacKay Shields does not see an imminent downturn, however, and while risks are increasing, so are opportunities. The approach is to focus on investment themes that reflect both the maturity and outlook for the economic cycle, as well as the opportunities in sectors and security.

‘Our process focuses on identifying and avoiding uncompensated risks that exist in the markets and in individual securities,’ Roberts said. ‘The key risks we see include technological disruption across a range of industries from energy to retail, together with idiosyncratic risks.’

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