SMSFundamentals | Sep 06 2012
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By Greg Peel
“Australian funds have been early adopters of real assets and have led the world in infrastructure and real estate investment,” notes Joe Azelby, head of Global Real Assets at JP Morgan Asset Management in New York. “Like their global counterparts, they realise they won't achieve the returns they need from fixed income and equities, as low bond yields along with outsized equity market volatility and modest equity returns have brought us to a new asset allocation tipping point”.
When Mr Azelby speaks of “Australian funds” he is referring to superannuation and other fund managers of the institutional variety. JP Morgan is presently hosting an Alternatives Forum for fund managers in Sydney and Melbourne.
So-called “alternative investment” has become the catch-cry in the post-GFC world. Alternative investments are basically categorised as assets other than traditional listed equity and fixed income investments. They include commodities, which are mostly accessed via exchange traded funds (ETF), infrastructure, which is mostly accessed through listed infrastructure funds, and property, which can be accessed in a myriad of ways including listed real estate investment trusts (REIT), unlisted property trusts and direct property acquisition. These are the “real” assets.
Note that while listed REITs and their infrastructure counterparts form part of “the stock market” and are included in stock indices, from an investment point of view they are classed as alternatives rather than equities.
JP Morgan's paper suggests investors who recognise and embrace the move towards real assets are likely to achieve better investment outcomes than those who do not. JPM might be speaking to institutions, but of course the same applies to smurfs (SMSF). JPM is calling it “The “Realisation Pyramid” shows, JP Morgan – creators of the pyramid – consider such investors to be “enlightened”.
While the Australian pyramid is not too different to an equivalent global pyramid in allocation, the difference is we tend to stay close to home, investing mostly domestically. In his capacity, Azelby oversees US$60bn in real asset investment across the US, Europe, Asia and Australia. Investors, says Azelby, are increasingly searching out alternatives to the “big two” of equities and fixed income. And that's an issue if you are a “big two” stalwart in Australia. The fixed income market is comparatively shallow here and the equity market is highly concentrated, with the big miners, big banks and one telco representing the vast majority of the cap-weighted index.
Yet Australia's sophisticated superannuation system lends itself to long term investing in real assets to generate income required to meet the retirement needs of so many Australians, JP Morgan believes. Real assets are fast becoming a third “traditional” asset class, offering a compelling mix of yield, equity-like upside and inflation sensitivity. Such structural shifts in investment philosophy do not come around very often, and require some momentous event such as the GFC. But the lessons learned do tend to stick.
A select group of investors is at the vanguard of a rare structural shift in pension fund allocation, in which real assets play as critical a role in asset allocation as equities and fixed income. “Early movers,” says Azelby, “should continue to be rewarded.
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