Capturing the real asset opportunity
John Cassedy, head of insurance coverage, Americas at DWS, talks about the significant opportunities offered by real assets
What are the main trends in infrastructure and real assets investments?
The marketplace continues to allocate to alternatives, including infrastructure and real assets. Our clients are not an exception, increasing their allocation to more alternatives, with infrastructure, and real assets, playing an increasing role. While infrastructure and real assets are attractive from a return perspective asset allocation models favor infrastructure and real assets due to the monopolistic characteristics inherent in the asset classes, which result in a lower frequency of default with higher recoveries in the event of a default.
The recent interest in infrastructure and real assets is across equity and debt strategies. The increase from an equity perspective is more pronounced in Europe and Australia as infrastructure is a mature asset class, having been investable for decades. The acceptance of the asset class by the regulatory regimes through deliberate capital relieve also play a significant role in Europe. The U.S. market is evolving, especially given the current need for investment. However, one should not discount the significance of the municipal market, and the role it plays in the ownership and financing of infrastructure and real assets can't be over looked. The government-sponsored tax-exempt funding has a direct impact on opportunities presented to investors and third-party capital.
What's your outlook for infrastructure and real assets over the next year?
In this low for longer yield environment (negative in many places), assets with positive yields will remain in demand. When combined with their monopolistic characteristics, lower historical default rates, and higher recoveries, demand for infrastructure and real assets should remain strong. The stability of the income and its contribution to the return differentiates infrastructure and real assets, increasing their attractiveness in asset allocation models. When combined together, these factors are very supportive of expanding allocations to infrastructure and real assets.
Do you see insurers continuing to be attracted by infrastructure and real assets?
Absolutely. With the yield environment continuing in this low to negative framework, global perspective, with a very pronounced, negative framework, and a need for positive income or positive sloped assets is extremely attractive and necessary. In the U.S. real asset yields are attractive on their own. When combined with the current levels of elevated inflation, transitory or not, infrastructure and real assets provide some natural protection to the effects of inflation. This natural protection in this environment will amplify the demand.
The U.S. looks to be offering good opportunities for infrastructure investment-- is this likely to benefit insurance investors?
Given the clear societal needs, both governments and investors are looking to play a critical role to meet the forecasted demand. While the municipal bond market will play a significant role in the government response, its role will be evolving through time. Recently there has been increasing chatter around reintroducing Build America Bonds, a tool used in the Great Financial Crisis to attract additional sources of capital; The Life Insurance Sector. The role of public- private partnerships is also an area of interest to keep an eye on.
In terms of real estate, what has been your experience through the last year?
Real estate, especially commercial real estate, has been topical given work from home or remote work trends that have taken hold during the ongoing pandemic. While various dynamics have become more prominent or even accelerated due to the pandemic, the one that has been the most pronounced is increased demand for industrial assets, especially "Last Mile" industrial assets. However, investors should not discount the prospects of structural or fundamental shifts in supply and demand in other segments of the commercial real estate marketplace. With vaccination rates increasing and other treatments becoming available, "Return to the office," initiatives will be increasing. Providing a needed boost to our urban areas across the country.
How have you been looking to combine ESG into your real assets offering?
We are very deliberate when it comes to factoring ESG into strategies, including infrastructure and real assets. Our approach is not new; by factoring in both the sector and asset perspective, we can tailor our impact across multiple ESG touchpoints. From a top-down perspective, sector allocations, like alternative energy sources, is one tool. Our team actively manages our portfolio assets from a bottom-up perspective, which is another way to include ESG into our portfolios. Today, technology, when used properly, is allowing us to drive efficiency from our existing assets. This improves the cashflow and the potential valuation of the asset. We look to employ as many ESG factors as possible in our infrastructure and real asset strategies.