18 January 2023
Aviva Investors Real Assets Study 2023
The time is now, the question is how
Institutional investors continue to embrace real assets with vigour, driven by rising appetite for inflation-linked income and, in part, the strong momentum behind sustainable investment. Our poll of 500 institutional investors — drawn from the UK, Europe, North America and Asia Pacific region, with US$3.5 trillion of assets under management collectively — reveals almost two-thirds (64 per cent) of organisations plan to increase their allocations to real assets in the next two years.
For many institutions, this is evolution rather than revolution: close to half (47 per cent) reported existing real asset allocations of up to ten per cent. Furthermore, investors intend to take a measured approach to increasing allocations: almost half (46 per cent) of investors polled expect to lift their exposure to real assets by up to ten per cent.
Real estate equity remains comfortably the most popular real assets strategy. However, its use has edged slightly lower, dropping from 31 per cent two years ago to 30 per cent today, where it is expected to stay in two years' time. By contrast, infrastructure equity allocations are on a gently upward trajectory, rising from 12 per cent two years ago to 13 per cent today, and projected to nudge higher to 14 per cent in two years.
Diversification key but inflation and ESG increasingly important
Diversification remains the number one driver for investing in real assets. However, the proportion of institutional investors citing diversification as their primary reason for allocating to the asset class has dropped, from 64 per cent three years ago to 57 per cent today.
By contrast, with inflation looming large in the economic landscape since mid-2021 and acutely so in 2022, the attraction of real assets' ability to provide inflation-linked income has jumped. Three years ago, one-third of investors (33 per cent) allocated to real assets mainly to generate inflation-protected income. Today, that figure has risen to over half (53 per cent); within Europe, inflation-linked income has overtaken diversification as the primary reason behind allocations, while well over half (63 per cent) of North American institutional investors cited inflation-protected income as the dominant driver.
The use of real assets to make a positive ESG impact has also climbed, from 17 per cent three years ago to over one-quarter (28 per cent) of institutional investors today. However, there is a clear regional variation beneath this headline number. Around one-third of the institutional investor community in Europe (35 per cent) and Asia (31 per cent) mainly employs real assets for their positive ESG outcomes, compared to just ten per cent for North American investors.
Beware greenwashing and inflated valuations
The sea change in attitudes towards ESG and sustainable investment approaches, albeit less prevalent in North America, has perhaps been the biggest structural trend in the investment industry in recent years. This has extended to the real assets arena. Nine out of 10 (93 per cent) of institutions consider ESG a factor in investment decisions involving real assets. For almost one in five institutions (17 per cent), ESG and sustainability matters are a critical factor in their real assets investment decisions.
But does the ESG walk match the talk? Interestingly, beliefs over the importance of sustainable investing are running slightly ahead of perceptions of the impact potential of sustainable real assets. Two-thirds (67 per cent) of our survey reported their organisation has a responsibility to invest sustainably, but only one-half (50 per cent) believe real asset investments can have a more direct ESG impact versus listed equities and credit.
For institutions drawn to sustainable real assets, key motivations included alignment with corporate values (60 per cent), risk management (58 per cent) and increasing evidence of improved financial performance from investing sustainably (54 per cent). Meanwhile, greenwashing (52 per cent) represented the biggest material risk to investment in sustainable real assets. High valuations (44 per cent) and difficulty in evidencing or measuring positive impacts (43 per cent) completed the trio of top-ranked risks.
When it comes to sustainable investments, returns still matter most
Moving beyond the broad motivations and risks associated with sustainable real asset investment to the approaches, over three-quarters (79 per cent) of investors favoured a fund or strategy that prioritised financial returns while also integrating ESG factors. Again, regional differences are evident. Whilst 90 per cent of North American investors preferred a returns-led approach, this preference was lower among European (71 per cent) and Asian investors (82 per cent), with both regions more receptive to strategies with a pure ESG focus.
Direct investment (46 per cent) and multi-asset pooled funds (40 per cent) were the most popular means of accessing real assets, while investors tipped impact pooled funds with a specific ESG goal as likely to experience an uptick in interest in the coming year. Despite the growing awareness of investors' broader environmental and societal responsibilities, returns still matter most: a fund manager's performance record (81 per cent) was the most important criterion when selecting managers for sustainable mandates, coming ahead of managers' ability to evidence their ESG impact (72 per cent).
While one-half of institutional investors polled have made a net-zero commitment, just under one-quarter (24 per cent) have not and have no plans to do so, as was the case for 39 per cent of North American investors.
There is also an apparent lack of confidence in net-zero actions and the role real assets can play toward meeting this ambitious goal. Over one-half (56 per cent) of institutions were unsure or lacking confidence in their ability to meet their long-term net-zero and sustainability commitments from their real asset investments.
Recession fears, inflation and rates biggest risks
Looking ahead, institutional investors identified a global recession (63 per cent) and inflation and interest rate rises (62 per cent) as the biggest potential threats to real assets over the next 12 months.
Meanwhile, our cohort highlighted difficulties in finding suitable investment opportunities (53 per cent), high transaction costs (50 per cent) and asset valuations (50 per cent) as the greatest barriers to new or additional investment in real assets.