In co-operation with a Swedish endowment fund, DWS (formerly Deutsche Asset Management) explored a strategy which became a fund available to others in November 2015. The DWS Real Assets Income Strategy, the manager discovered, also fit the requirements of a range of investors in the current climate.
According to Matthias Meyer, the head of investment specialists for liquid real assets for Asia Pacific and EMEA, most endowments have a capital base which they cannot or don’t want to spend and therefore need a certain income to fund their good cause and cover expenses. This sounds a lot like what most retirees would like to do as well. Also, because an endowment is set up, theoretically, for eternity, inflation protection is important. The endowments usually have a goal of 3-5 per cent above inflation.
“So we looked at alternative investments and came up with listed infrastructure and listed real estate, both global, with the underlying value coming from owning the assets,” he said last week on a trip to Australia from his base in Frankfurt.
One of the surprising facts about the two listed asset classes chosen is the very small overlap they have – 3 per cent – with the MSCI World index. Investors get instant diversification, Meyer says. He also has noticed an increasing amount of interest from super funds, which until relatively recently have preferred unlisted infrastructure and often treated REITs as broad-market equities.
“Listed investments can offer greater opportunities,” he said. “For instance, we have bought shares in a company that has 125,000km of pipeline. To invest in a similar business through the direct market might cost $50 billion.”
An apparent anomaly between listed and unlisted, at least in infrastructure, as previously reported, is that the listed market will often trade at a slight discount, which investors can tactically allocate to take advantage of the discount. Normally, investors are paid a premium to tie their money up in the less liquid unlisted market.
Meyer believes there are several reasons for this, such as:
- despite cashflows between the two being similar, differences in accounting rules and the measurement of volatilities create arbitrage opportunities
- insurance companies have strong solvency rules, tilting the capital towards unlisted assets, and
- in the past 18-24 months tech stocks have done well globally – increasing their market caps in the index – but listed infrastructure stocks tend to have low beta and are “less of a lottery ticket”.
Other infrastructure managers have also claimed that the weight of money from big super and pension funds has tended to push up the prices of unlisted assets, although one would think this would get arbitraged away over time.
Meyer believes there are still attractive opportunities to be found in both listed and unlisted infrastructure, especially in the major mature or maturing markets.
The markets do not need to be expanding as a whole for those opportunities to be evident. For instance it requires something like 3-4 per cent of a nation’s GDP just to maintain its infrastructure assets. US governments – federal, state and municipal – have been famously under-investing in infrastructure for years.
A favourite example is water. There are still some wooden “pipes” in use in the US. Meyer points out that clean water is “quite forgiving”. If you get a leakage people tend not to notice, unlike problems to do with transport systems.
The DWS fund has returned 5.6 per cent a year since inception compared with the manager’s reference benchmark of 5 per cent, and 5.5 per cent over two years (compared with 5.3 per cent for the benchmark) and 3.0 per cent over one year (2.1 per cent). That benchmark is comprised of 50 per cent the Dow Jones Brookfield Infrastructure Index and 50 per cent EPRA/NAREIT developed index.