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Ashton Reid

Real assets strategy passes its COVID test

By Ashton Reid
4 minute read

The emergence of investment strategies based on real assets as an alternative source of income to fixed income followed one crisis – the global financial crisis (GFC) – when interest rates were suppressed by central bank money printing and quantitative easing. Another crisis, the COVID-19 pandemic, has put that strategy to the test. That’s because real assets have been at the epicentre of social distancing and lockdowns.

The appeal of real assets is that they tend to be independent of the economic or business cycle, with the customer bases for toll roads and electricity grids, for example, driven more by population growth, which is all-important for real assets. Other real asset sectors that have this growth driver include commercial property, airports and pipelines. It’s possible for an investor to find these income characteristics across a diverse array of industry exposures that can reduce volatility.

Real assets can combine the predictability of bonds and the inflation-linked growth of equities, making them almost a separate asset class. This asset class boasts yields that are generally more attractive than fixed income, while their risk levels are generally lower than broad-based equities.

Real assets and the COVID-19 crisis 


When COVID-19 hit last year and people stopped going about their everyday business, it had a sizeable impact on real assets cash flow. However, it’s important to note that not all real assets were impacted in the same way. Electricity grids and gas pipelines that deliver energy to homes continued to deliver that energy and, in some cases, benefited from people spending more time at home.

Importantly, since restrictions have been eased, we’ve seen people’s eagerness to get back to their everyday lives reflected in both foot traffic data and in economic outcomes from many real asset businesses. That is to say, the lockdowns artificially changed the choice architecture of people’s lives and that had an impact, but people are instinctively social creatures and real assets are poised to recover since they are structurally embedded in so much of our social lives.  

And while central business districts have continued to lag in the recovery, other real assets have shown a strong bounceback once constraints were removed. COVID recovery plays might include retail property holdings, including neighbourhood centres anchored by supermarkets and high-end shopping centres where foot traffic is returning. Growth in online sales has provided an opportunity for businesses building industrial space that can be used for warehousing and logistics.

Some of the assets that have continued to do well include property portfolios with long-term retail lease holders like Bunnings and petrol stations; New Zealand green hydro utilities; pipeline owner APA Group; and gas and electricity networks.

Post-pandemic income exposure 

The transition from accumulation of wealth in their working years to retirement remains an important issue for investors. This is when they need to use their assets to maintain living standards and deal with longevity risk.

The post-GFC period called for a new income paradigm and so will the post-COVID-19 period. Since the GFC, we have seen interest rates suppressed by central bank money printing and quantitative easing. This has meant that the appeal of traditional income options like term deposits and traditional fixed income has been greatly diminished.

Real assets have an important part to play in this investment landscape. For instance, investors will look for assets that have built-in inflation protection. This might be through fixed increases in rents or contracted prices each year. This allows the investment to grow its dividends to match rises in the cost of living. Real assets, which include commercial property, utilities and infrastructure, occupy a space between bonds and higher-risk equities and as such are a natural choice.

Real assets today 

Where we sit today, income levels from a real assets strategy are down from pre-COVID levels, but strong growth in income can be expected as restrictions continue to ease. A diversified portfolio yield of around 5 per cent is not unrealistic.

And given what’s happened with the Australian 10-year government bond rate, which is currently around 1.1 per cent, income solutions from fixed income are under even more pressure.

With real assets priced with reference to those risk-free rates, the wide income spread on offer from real asset yields looks attractive.

Ashton Reid, portfolio manager, Legg Mason Martin Currie Real Income Fund