J.P. Morgan predicts big jump in real assets

Allocations to real assets should rise to 25% of the average pension fund's assets in 10 years, up from 5% to 10%, according to a soon-to-be released white paper from J.P. Morgan Asset Management (JPM).

A number of funds, mostly in Canada, already have 25% real asset allocations, the report said.

Only 2% of global institutional investors representing $709 billion in total assets under management are in the high allocation group, the paper said. Another 5%, representing $3.8 billion in total assets, have allocations of 15% to 25% across multiple real asset strategies.

Thirty-six percent of plans have real asset allocations of 5% to 15%, often entirely in core real estate, the report noted.

Institutional investors have “become particularly enamored with bonds,” said Joseph K. Azelby, head of J.P. Morgan Asset Management's global real assets group in New York. “As interest rates got lower, they bought more bonds.”

The very low fixed-income returns that investors will experience will force investors to rethink that allocation, he added. “I would argue they (investors) don't own enough real assets, an asset class that can produce higher income yield than fixed income,” he said in an interview.

For purposes of the analysis, the real assets category included commodities, infrastructure, real assets (distinct from other classifications), real estate, timberland, natural resources and real estate investment trusts.

Not only do investors not have sufficient exposure to real estate, they have not yet made “meaningful allocations” to infrastructure, Mr. Azelby said.

Investors are less familiar with infrastructure, which offers very attractive income yields and is significantly less expensive, than real estate, he said.

Christopher H. Hoeffel, managing director in the New York office of alternative investment manager Investcorp, who has seen the paper, agreed that since the 2008 credit crisis, investors in the U.S. and the Mideast are increasingly interested in certain real assets.

“A lot of investors are seeking more current cash flow. That bodes well for certain asset classes including real estate or debt ... where there is consistent monthly or semiannual cash flow,” he said.

Jack Foster, head of real assets in the New York office of Franklin Templeton (BEN) Real Asset Advisors,agreed there is more interest from institutional investors in real assets, but said many global investors are still working under allocations adopted before the financial crisis.

At the same time, investors' expectations have changed, Mr. Foster said. Infrastructure investors, for example, now prize income and stability with a minimum of risk, he said. They seek infrastructure returns in the 10% to 15% range, he said. This means no so-called “green field” investments, which includes new development projects. Instead, their focus is income generation, rather than a focus on appreciation as well as income.

“A new asset class has emerged since the global financial crisis, and that is called risk,” Mr. Foster said. n

— Contact Arleen Jacobius at ajacobius@pionline.com