Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Time to get real?
There are plenty stepping up to criticize industry super funds for their apparently overloaded weight to real assets that can’t be realised or readily valued in a period of market turmoil. It suffices to say that if these were openly traded, the gap between stated valuations and daily realised price would likely be problematic. That does not mean anyone has done wrong.
Equities are the outlier with high frequency, easily observable pricing. But that does not mean the price reflects the fair value at all times.
Credit securities have also seen extreme price dislocation without the irregular revaluation schedule for real assets. A messy combination of heightened default risks, the incapacity of banks to hold onto credit as market makers (due to regulatory changes during the financial crisis of 2008/9) and portfolio rebalancing resulted in a huge spike in the interest rate spread to bonds. Recently this has retraced as participants reassess these moves as overdone.
Should investors look for better value and stability in real assets now? This is no easy assignment as it requires judgement on as many factors as face other financial assets. Real assets include property, infrastructure such as rail, road and airports, energy and water utilities and, more recently communications and data centres. Each has subsets.
Take property, with the notable divide between retail, office, industrial and residential that have their own dynamic largely unrelated to the other. Lease terms vary and sensitivity to economic conditions and demographics are far from uniform. There is a chasm between regulated and unregulated assets often with a political agenda.
Financially there is a further layer. Gearing is a big differentiator dependent on funding structure, distributions and growth investment. Notable are those that pay out more than current cash flow on the expected future investment returns will make up the difference. Valuation is based on discounted cash flow where the sensitivity to long-run interest rates is the key factor.
Industry funds operating on the assumption that things would remain stable and that the tail wind of duration (the sensitivity of price to long term interest rates) be a reliable friend is proving flawed. Add to that the contribution these assets have to the stated volatility measures we all like to think are statistically sound.
For private investors, this should not matter as much. What does is the reliability of real income. A government lease for 15 or 20 years is unquestionably a higher-valued asset compared to a discretionary retailer. A water utility has low economic sensitivity compared to an airport, but is also low growth and generally regulated. Expect a different distribution of volatility and returns for each.
The challenge is to work out the valuation differential that should apply and adapt that to changing conditions, not least the ones we front up to today.
Real assets should be in investment portfolios. If directly held, say a residential investment property, it should be valued on all the extraneous metrics that apply elsewhere. Listed investments are good for liquidity and broader participation, though the Australian based universe is a narrow representation.
A good global manager of listed infrastructure is a better option and there are a number with a reasonably long track record that befits the asset class. Yet they are still equities, prone to markets and management direction.
Direct investment akin to industry funds is harder. A few options have surfaced but may have compromised fee structures or long lock-ups. They require a very long term approach and sizeable funds under management. There have also been the few that have lead investors into small cohorts of property in foreign countries with mired complex arrangements skewed to the benefit of the provider.
Don’t be put off. There are credible unlisted entities where liquidity constraints are transparent and in the interest of the investor. The potential income return is more attractive than credit yields and differentiated from equities.
