What are the real asset alternatives to balanced and long lease property for pension schemes? What differentiates them and how can investors use them?
Real assets are anything where there is a tangible/physical asset being traded. Typically these are private market assets which yield long-term income, that may be linked to inflation. For a portfolio, real assets bring diversification from the traditional asset classes and will often benefit from an illiquidity premium.
The most common real asset class held by pension schemes is property, with two main types of fund being balanced and long-lease property. Balanced property funds invest in a diversified range of UK commercial real estate. Long lease property funds also invest in commercial property, but focus on longer lease lengths (which may be up to 25 years) and inflation linked income. Both offer low correlation to fixed income and equity markets.
These types of funds have dominated the landscape of the real assets universe, and with recent market volatility and inflationary pressures, the demand has grown and more funds have been created to access this market. The effect for investors is that typical queues have lengthened and in some cases it can take two years or more to invest capital. Other sub-asset classes have, in comparison, been underutilised.
This paper introduces four sub-asset classes and provides our view on the opportunities available. We discuss four alternatives:
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