Institutional investors expect to increase allocations to real assets over the next 12 months in the face of a challenging political and economic environment, according to Aviva Investors’ 2020 Real Assets Survey.
The findings, based on the responses of 500 insurance and pension fund investment decision-makers, found that 51 per cent of insurance and 37 per cent of pension fund executives expect their investments in real assets to increase. With uncertainty over global growth and the likelihood of interest rates remaining lower for longer, institutional investors continue to look at private assets for diversification and potential illiquidity premium over public markets.
Both insurers (44 per cent) and pension funds (38 per cent) said escalating trade wars were a concern to their real asset investments over the next 12 months, whilst the continued lack of clarity over the future relationship between the UK and the European Union was also a concern.
The findings also emphasised the increasing importance investors place on environmental, social and governance (ESG) issues and the desire to demonstrate that real assets have a broader benefit than financial returns. Nine in 10 respondents said they consider ESG to be important in investment decision making, and of these, 40 per cent of insurers and 42 per cent of pension funds consider a ‘favourable ESG impact’ of Real Assets to be integral. Insurers are also more likely (50 per cent) than pension funds (41 per cent) to consider the ‘transparency of asset managers’ ESG investment approach’ when looking at external investment providers.
Investors also highlighted a preference for multiple strategies within real assets allocations. Direct real estate (53 per cent), infrastructure equity (53 per cent) and structured finance (52 per cent) are pension funds’ most sought after strategies, while over half of insurers expect to increase investments in real estate finance (54 per cent), infrastructure equity (52 per cent) and structured finance (51 per cent)
The research also found that 43 per cent insurers and 40 per cent pension funds raised fears that ‘regulatory interference’ was proving challenging to investment activities. Both groups (37 per cent of insurers and 30 per cent of pension funds) cited the lack of regulatory harmony across Europe as a concern.
In addition, 49 per cent of insurers and 45 per cent of pension funds perceive ‘financial instability’ as the most likely and concerning event for real asset investment over the next 12 months, while 30 per cent of insurers and 26 per cent of pension funds believe ‘difficulty finding suitable opportunities’ is the biggest barrier to investing in real assets or increasing existing allocations.
Mark Versey (pictured), CIO of Avia Investors Real Assets, says: “Strong appetite for Real Assets is unsurprising given the continued global backdrop of political and economic uncertainty. As well as offering investors cashflow-matching characteristics and added diversification, returns for the sector have been dependable and buoyed by the illiquidity premia they can offer.
“The growing influence of ESG is another undeniable trend, however the lack of readily-available information can create difficulties in quantifying the ESG credentials of a project. This makes integration complex and something that must be undertaken on a case-by-case basis.
“The boundary between infrastructure, real estate, and private debt is increasingly blurred. Investors are looking for multi-asset portfolios with an outcome-oriented focus, whether that be growth, long income, or predictable, inflation-matching cashflows. New entrants and rising allocations from existing investors increase the risk of overcrowding and of returns being squeezed in well-trodden areas of the market. Investors need to consider this when building strategies to ensure they achieve the best possible outcomes.”
