Why you should listen to the interview: A great introduction to how this fund can diversify a portfolio and offers investors a return profile that’s very different to other funds out there. Plus hear more about how the fund’s four core real asset categories combine to offer a range of drivers at different points in the economic cycle, as well as a strong level of inflation protection.
This interview was recorded on 4 March 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please watch the full interview between Darius McDermott and Vince Childers.
Highlights in this interview:
Real Assets: underpinning and facilitating global, economic growth
“The fund is focused on the listed, exchange-traded liquid markets in real assets globally. To us, real assets are the structures and raw materials that really underpin and facilitate economic growth around the world. This points us toward tangible assets which are very often assets that come earlier in the supply chain, and that tend to be sensitive to changes in inflation rates.
“What that really boils down to is a set of four core real asset categories, the first being global real estate securities, so REIT structures where you have them but really investments in owners, operators and developers of commercial real estate around the world. The second is exposure to the economics of commodity futures, what I characterise typically as the here-and-now of supply and demand in commodities. Also investments in natural resource equities ie. the producers of commodities, for example, agribusiness, mining, energy and the like. And fourth, global listed infrastructure which is probably the most diversified of the real asset categories, spanning everything from utilities and transport through to things like midstream energy and even communication towers and so forth. About 90% of our portfolio at any point in time is going to be focused on those core real assets.”
Why global infrastructure
“Currently, global infrastructure is the biggest overweight versus our benchmark in the portfolio with the primary driver being the story around valuations. Valuations look uniquely attractive particularly versus global equities. If we look at some very basic metric like an EV/EBITDA, typically infrastructure is going to trade at a premium, at least post the financial crisis. They’ve tended to be trading at 10-11% premiums whereas today, we are seeing more of a 7% discount. This is probably the second most attractive valuation period we’ve seen since Covid.
“Also the defensive aspects of global infrastructure look interesting to us in the nearer term. We think if growth were to decelerate, then typically you get a bit better downside protection in the listed infrastructure universe than you do in some of the other real assets. And so that kind of lower beta, more defensive quality is something that looks attractive to us.
“In terms of what we like within infrastructure, midstream is a focus of ours right now. This really ties back to the North American energy story which is really a story about regaining capital spending, discipline de-leveraging, cleaning up balance sheets and focusing on free cash flow generation as opposed to a ‘growth at all costs’ mentality. With those free cash flow options, you have companies that can engage in share buybacks, deleverage, further, pay dividends without having to fear turning around and cutting them, so this is a place we are overweight and we like.”
The potential of natural resource equities
“If we take pretty much any standardised earning metric and look at where these assets are priced, the market is basically giving no respect for the actual cashflow-generating abilities of much of this universe. And so when we look at free cashflow growth and the potential there versus what the market is pricing, we see a huge gap and that spells higher future return expectations to us. And we think we can manage the risk of these assets inside this broader portfolio a little bit more efficiently. If we look at big portions of the energy universe, there are companies that are currently delivering mid-teens free cashflow yields and there’s no expectation that assets are going to zero anytime soon. And so we see a story there that the market we think is just kind of overlooking.”
Diffusing the impact of inflation
“We don’t typically take a very strong stand on an outlook for inflation ourselves. The basic idea is that, to some extent, the whole reason you want a portfolio like this, one that tends to be sensitive to unexpected inflation, is precisely because people are bad at predicting it.
“If we rewind the clock to early 2021, there were very few people who saw what was coming, in terms of inflation shock and magnitude of inflation surprise. And so I tend to start with this view that we need to have very high conviction in our ability to forecast inflationary outcomes and better yet, be able to be among kind of the lead steers out there who are changing the asset prices in advance of the actual realisation. It’s just a very, very heavy lift so we tend to discourage people – including ourselves – from trying to be too tactical around inflation outcomes.
“That said we will have views that we can lean into a little bit here and there, but we tend to take that with a grain of salt. By far the biggest levers that will push our portfolio away from our neutral positioning are going to be things like growth profiles, valuation considerations and so on, and not so much us wanting to stick our necks out and think that we’re going to be better than the marginal predictor of inflationary outcomes.”
Conclusion:
Vince explains clearly how the fund offers investors a single destination for a range of inflation protecting assets, built with an eye on diversification, as well as returns. This is supported by the wide arrange of expertise at Cohen & Steers as industry leaders in real estate and asset-backed securities.
This Investment Q&A was part of a wider video interview aimed at professional investors. To access the full interview, you will first need to register for a free FundCalibre account. Sign up here
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