The current market environment led for several years by very low - and even negative - yields is leading institutional investors and asset managers to find alternative investment supports (real assets or private equity) to provide sustainable returns to their customers for the years to come.
With investments in real assets and private equity strongly increasing over the years, asset servicers and asset managers are searching for solutions capable of handling these asset classes, in their global investment solution, together with traditional investments.
Traditional equity and fixed income investments’ rates of returns have been very weak for the last couple of years, driven by a constant decline and even negative interest rates.
These returns are no longer sufficient to produce attractive insurance life rate returns and to allow public or private pension and sovereign-wealth funds to view the future with confidence, with increasing average lifetime and if not decreasing pension contributions of retired employees. The scale of the problem is massive. Over one in four European pension funds report negative cash flows. In the US, cash flows of defined contribution schemes on the pension market could be negative by 2020.
Private equity and real assets investments are seen by the market as a good balance between performance and risk, providing attractive yields with long-term capital appreciation and with relatively predictable cash flows, and ensuring growth irrespective of market cycles and macroeconomic volatility, even if capital loss is a real risk.
The craze for these asset classes can be explained by the long-term nature and returns over the complete life cycle of these investments which matches well with long-term commitments of pension funds.
Some studies expect this trend to accelerate over the course of the next decade, with allocations to Real Assets reaching 20 to 30% of portfolios by 2030, with some institutional investors allocating upwards of 50% to the asset class.
Institutional investors should seek to identify the right combination of assets to ensure an independent, uncorrelated and reliable Alpha source, while minimizing global risk exposure.
However, the impact of several combination of asset classes, alternatives and traditional, on the global risk exposure is nonetheless complex, requiring risk evaluation on the basis of a graded risk assessment (tiered approach). Institutional investors needs to rely on multi asset classes investment solutions capable of displaying consistent views of risk and performances of their multi-asset class portfolios.
According to the ESMA 2016 Report on Trends, Risks and Vulnerabilities, monthly rates of return in the EU fund industry ranged below zero for all fund types except for real estate funds.
In 2015, French real estate and capital investment funds increased their AUM by more than 10%, whereas the market grew by 5% on average. (Source: AFG annual Report 2015-2016).
The French real estate market via dedicated Investment Funds (OPCI, SCPI) reaches €100 billion at the end of 2015, against €79 billion in 2014 and €33 billion at the end of 2010.
Main Potential Benefits of Real Assets Investment
- Stability: Steady future cash flow streams
- Income / Yield: Reliable income with long-term capital appreciation potential
- Portfolio Diversification: Low correlation to traditional equity and fixed income investments
What Are Real Assets?
Real Assets are often defined as physical or tangible assets that tend to provide a “real return”, often linked to inflation.
This definition encompasses a wide range of potential investments, including:
- Office and Retail Property / Real Estate
- Infrastructure (Transportation, Renewable Power, Energy, Utilities)
- Precious Metals
- Natural Resources
Main Downsides of Real Assets Investment
- Liquidity Risk: These investments have a lower liquidity than Financial Assets. Liquidity Risk should be carefully monitored on these investment supports
- No Risk-Free Investments: Potential Capital Loss, potential Credit Risk
- Regulatory requirements, such as Solvency II (Capital Adequacy) for insurance companies also need to be measured on these asset classes.
- Pricing: These assets should be evaluated on a regular basis.
- Static Data: These assets need to be properly managed as all other Static Data.
Solutions to Manage Real Assets
All of NeoXam's solutions manage real asset investments, from NeoXam DataHub and our Portfolio Management Systems to NeoXam GP3 for investment accounting.
Our pool of experts is always here to provide our clients with the best-in-class service.