David O’Shea, CEO, BlackBee
The challenges facing investors today are unique. We live in an era of shrinking and correlated investment returns where investment options are diminishing rather than growing. If correlation in financial markets increases and parallel markets move lower, then all asset classes will likely suffer and client portfolios may become more difficult to manage. While many will advocate a movement to cash in this scenario, history has taught us that allocation decision is rarely profitable and typically short term. It does not answer the core investment issue for investors – where to derive consistent and uncorrelated returns? The answer may lie in Real Assets. Real Asset investing provide direct exposure to physical assets where returns are linked to the performance of the asset and the ability of the assert to generate income. For investors they can deliver:
• Sources of uncorrelated returns.
• Stores of intrinsic value.
• Natural hedges against Inflation and interest rates.
• Steady cash flow and asset appreciation, although values can fall as well as rise.
Traditionally, Real Assets have typically been difficult to access, mostly unregulated and the remit of large firms. Today real assets have come of age and at the right time now for both investors and advisers. Investors can now broaden their investment choices, gain a real proximity to their investment and most importantly, do so in the knowledge of a strong regulatory framework.
Financial Versus Real Asset
Investing in physical or real assets formed the very basis of our financial system and extends back to antiquity. The very concepts of investing and trade were borne from individuals exchanging physical assets. Real Asset investing is very different from financial assets in that the former provides for direct exposure to physical asset whereas the latter typically provide a packaged or synthetic exposure.
It was only in the 1500s that investing took a quantum leap moving from this exchange of physical assets to financial assets with the establishment of trading exchanges to allow for great volume and speed of transactions. Since then, financial assets and not real assets have been the primary method in which private and pension investors have built and managed portfolios. Today investing in financial assets often constitutes as much as 95% of a typical investors investment portfolio. Real Assets, on the other hand, have more commonly became the preserve of larger funds, private equity firms and governments, and the benefits of real asset investing was largely lost to many smaller investors.
Everything Changed Post Financial Crisis
Post-financial crisis the wishes of global investors changed. They began demanding better fee models, more alignment with their investment manager, more effective regulations and uncorrelated returns. Investors simply demanded more from their investments. Real Assets have prospered ever since with global trends indicating that investors now allocate more to direct Real Assets than ever before and all polls indicate that this trend will continue for the next decade. This represents a key movement in global financial markets and one which Irish investors and advisers should consider building into their advice and portfolios.
Increasing Return and Reducing Risk
Specifically, increasing levels of regulatory change contributed to creating an environment for real assets to prosper. The highly-regulated investment world post-crisis meant more stringent product development requirements, more fee transparency and increased focus on investor outcomes. More effective customer centric regulation often results in better outcomes for investors so it is not surprising to note s that Real Asset opportunities post-crisis seem to have delivered better returns with less inappropriate risk taking by investors. Investors’ portfolios modelled with allocation to real assets may therefore result in improved returns for lower levels of risk. Additionally, the optimal portfolio allocation in real assets for an investor’s portfolio statistically lies between 20%-30%. That is significant.
Global and Irish Trends
While the global trend has been clear, the movement in the Irish market has been less so. This may be due in part to the historical proliferation of unregulated loan notes and the provision of Real Asset investing via fund-type structures. Neither reflect the new world of Real Asset investing. There is increased protection for investors operating in regulated environments, as strong governance, transparent fee disclosures and stringent regulatory oversight is the norm. Investing in Real Assets offers a new world of opportunities, but investor protection is stronger within regulated environments, Investors and advisers would do well to consider the risks of unregulated Real Asset investments, prior to investing and remain vigilant that these investments may be provided by either authorized or unauthorized investment firms.
Alternative Asset Investing Has Come of Age
The most impressive aspect of real asset investing is the broad options available to investors. Local Real Assets in healthcare, hospitality, leisure and accommodation can be readily structured to provide both income and growth opportunities and structured to cater for different levels of risk appetite. Facing into an ageing bull market and rising inflation, Real Asset investing may potentially offer the best value investment. Their ability to deliver uncorrelated sources of returns while reducing risk is proven.
Real Asset investing is not some utopian dream, it is an asset class that has come of age and represents a potential key ingredient for the success of investor portfolios. They should at the very least be part of all investment discussions.
Broaden your client’s options, strengthen their portfolios and work to deliver real returns. All in the confidence of the strongest regulatory framework. Welcome to the new world of real asset investing.
David O’Shea is the CEO of BlackBee Investments Ltd.
BlackBee Investments Limited, trading as BlackBee and BlackBee Investments, is regulated by the Central Bank of Ireland
The value of your investments may go down as well as up. Past performance is not a reliable guide to future performance.
As always, we would recommend you obtain independent financial advice prior to making any investment decisions.