This is a sponsored article from BlackRock.
Covid-19 has upended investors’ expectations and planning. Facing a period of lower for longer interest rates has led to reassessment of existing allocations and identifying potential sources of consistent, robust income.
Real assets have traditionally provided sources of stability in periods of uncertainty and market volatility. Ranging from economic infrastructure, such as windfarms and toll roads, to residential, commercial and industrial real estate, the asset class offers an attractive yield opportunity along with capital appreciation benefits. However, access to these investments has primarily been limited to institutional investors. High net worth and retail investors have traditionally been dissuaded from investing in real assets by the access challenges and the illiquidity of the asset class.
Comprising both real estate and infrastructure investments, BlackRock’s Global Real Asset Securities strategy aims to pay out steady and continuous income streams from infrastructure assets within the utilities, energy, power and transport sectors and the similarly reliable cash flows that Real Estate Investment Trusts generate across their underlying industrial, healthcare and residential sectors.
Attractive income payouts in a low-yield environment
The strategy targets an attractive income target greater than most fixed income/income funds in the market. Mainstream bond markets – the traditional bastions of income generation – are likely unable to yield above zero percent in the mid- and post-Covid 19 eras.
The Federal Reserve in the United States, for example, signalled in mid-September its intentions to keep interest rates at near zero until 2023 as the central bank looks to continue to support the US economic recovery.
To supplement income generated from dividends, the BlackRock Global Real Assets Securities strategy adopts a prudent covered call overlay strategy – selling call options on the long positions it holds in the portfolio to generate an additional income stream – that is supported by stock-picking expertise to deliver a return composed of roughly two-thirds income and one-third capital appreciation.
The investment team – whose senior leaders average 25 years of investment experience in real asset securities – provide investors with diversification both beyond traditional asset classes and also within their real asset securities portfolios. Never has diversification been more important. While the search for alpha is more intense than ever, it has become more elusive to achieve alpha in volatile stock markets and underperforming bond markets.
Diversification, diversification, diversification
BlackRock’s Real Asset Securities strategy amplifies diversification by investing in both established real estate sectors like apartments and offices and niche sectors including self-storage and data centres. Likewise, in its infrastructure portfolio, it invests across a broad range of sub-sectors including toll roads, cell towers and water treatment. A global investment strategy behind the strategy also means its holdings are spread across North America, Europe and Asia Pacific, giving it an additional overlay of geographic diversification.
Investors who suffered across-the-board plunges in their conventional holdings when Covid-19 first panicked markets in March will certainly appreciate the benefits of non-correlation that the strategy offers. James Wilkinson, Co-Global Chief Investment Officer, Global Real Asset Securities Group says, “One of the attractive aspects of real assets is the bond-like income it generates paired with the upside potential available through capital appreciation. At the same time real assets offer benefits similar to that of fixed income and equities, they offer a low correlation to these traditional asset classes.”
Investors will also appreciate the inflation hedge that real assets constitute, given that their values increase alongside inflation. Although few economies in the world can expect inflation in the short-term, a medium-term hedge against it is valuable in this newly uncertain world.
Megatrends driving the real assets boom
A number of structural megatrends are also underpinning the growing long-term attraction of real assets for investors. Climate change is one. Greater emphasis on such sectors as renewable energy will drive funds to infrastructure and enlarge the real assets space as a result.
Seismic changes in global demographics, urbanisation and social mobility are similarly contributing to the appeal of physical real assets. In 1990, for example, there were just 10 megacities, classified as places with populations of 10 million or more1,2. There are now 33 megacities and by 2030, 43 megacities are projected, mostly in developing countries.1,3 The associated demands on infrastructure these changes guarantee a surge in real assets investment.
Technological change will have similar effects. The global data centre market, for example, will grow rapidly. Just as this market will be driven by the rise in adoption of multi-cloud and network upgrades to support 5G, so the resultant capital investment required in physical assets and systems infrastructure will signal further growth in real assets.
Sherry Rexroad, Senior Product Strategist, Global Real Asset Securities team says, “While we are bottom-up stock selectors, we recognize the structural tailwinds at play. We aim to find the companies best positioned to benefit from megatrends such as technological change, a shift in demographics and climate change. Real Assets are at the foundation of our societies and institutions, they will see the direct impact of increased public and private spending in response to underlying megatrends across the globe.”
The right strategy at the right time
BlackRock’s Global Real Assets Securities strategy aims to offer investors relief from the pandemic’s many assaults. These threats include increased equity market volatility, greater correlation risk and lower bond yields for longer periods than expected. The strategy gives instant exposure to diversified institutional quality real estate and infrastructure. During periods of volatility, liquidity offers investors the ability to capitalize on dislocations immediately.
Upside benefits are also apparent because real estate and infrastructure securities have rebounded from their March lows but still remain -20% and -13% from their February peak, respectively, while the broader market has since reached new highs1,4. The strategy also has long term value: Listed real assets are expected to stabilize and continue to provide income with a dividend of 4-4.5% alongside capital appreciation benefits to achieve intermediate forecast growth of more than 6% per annum 1,4.
BlackRock Global Real Assets Securities Strategy
1. For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass.
2. Source: United Nations Department of Economic and Social Affairs, Aug 2014
3. Source: United Nations Department of Economic and Social Affairs, 16 May 2018.
4. Source: BlackRock, Sep 2020
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. The value of investments may go down as well as up.
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