Asian institutions risk overpaying for real assets

Institutions in Asia ex-Japan are forecast to raise allocations to real assets globally, including property and infrastructure, although they should be more discerning as they are overpaying, a conference heard.

Yet expectations that they would snap up distressed assets in Europe have failed to materialise, largely because governments there have been bailed out by central banks and saved from having to sell the “crown jewels”.

Unlike equities and fixed income, which you can trade quickly, real assets is all about selecting the correct exposures, said Anthony Fasso, international chief executive and head of global clients for AMP Capital, at AsianInvestor’s recent Asian Investment Summit in Hong Kong.

“It’s easy to feel like you are a winner in a tender situation by buying a trophy asset, but you pay the price for that down the track if you overbid," he noted, "and we do sense that there is a lot of overbidding going on at the moment, with a lot of people chasing very scarce, high-calibre assets.”

Fasso said it is generally the large sovereign funds chasing Anglo-Saxon assets. “There is a huge amount of investment into Australia and New Zealand, and the UK and a little into Ireland, that is where the money is being channeled, but less so in the US."

Malaysian institutions are keen on the UK and Australia because of common-law familiarity with the legal and regulatory framework, confirmed Garry Hawker, Singapore-based director of growth markets at consultancy Mercer. But there are tax issues in the US that make it unattractive.

He suggested that Asian institutions will raise their allocations to real assets, in part because their exposures are so modest but also as a reflection that they are growing and need to diversify.

“I guess the approach has only changed because they have gone from zero to something close to zero,” he said. “Allocations will continue to increase simply because the funds have grown and their allocations in percentage terms are still quite small.”

On the question of liquidity, Hawker noted that most institutions have been investing directly into real assets rather than through funds, and as a result are not subject to lock-up.

“They have got liquidity issues because they cannot necessarily sell at the price they want to tomorrow,” he added. “But they are still in the accumulation phase of property or infrastructure investments. These are growing funds, so liquidity is not a major issue at the moment.”

Earlier, Priscilla Luk, director of index research and design at S&P Dow Jones Indices, said she had seen institutional demand for Reits and other equity exposure to real assets, such as commodity-based index products.

“Equity-based products have higher liquidity, lower trading costs and more transparent pricing, and that has enabled investors to have better flexibility and more dynamic asset allocation,” she noted.

Luk added that equity-based products can make it easier to invest in some asset classes that are difficult to access, such as water, forestry and timber.

“There is continuous demand asking for infrastructure as a theme in the region,” she said. “We also have a lot of clients using our futures-based commodity indices.”

She noted clients were looking at exposure to real assets as an inflation hedge. However, Hawker noted that a Reits structure could, in fact, be a disaster as a hedging strategy.

He also questioned whether there was any effort to identify securities with inflation sensitivity built in when it comes to index customisation. “If you look at an aggregate of listed infrastructure relative to listed equity, the inflation sensitivity is not very different. Simply investing in Reits is not an answer to inflation hedging.”

One market where Reits have been popular is Japan, especially pre-Abenomics, and again flows have been pouring in. “The capital markets are catching up in some ways to deliver what will satisfy Japanese retail demand,” said Fasso. “You have to invent more securities to satisfy Japanese demand."

He noted that the Japanese were looking to extend further into emerging market Reits, and even into sub-regional exposures such as Asean Reit funds.

Hawker added that many funds in Asia did not appreciate that real asset portfolios are not as scalable to managers as the public markets, with human resources required to maintain and grow the portfolio.

“That is the part where they have got into trouble; they find it hard to maintain that allocation because the fund is still growing. So they have to deploy more capital and yet are busy on maintenance.”

Fasso noted a debate about open-ended structures as opposed to closed-end ones, which require sale of the asset after a designated period. “Separate accounts get around that because they have more transparency.”

Another issue that needs to be addressed is how to hedge the currency risk associated with longer-dated assets.

“If it is a first-time allocation, particularly into a separate account, do they hedge the whole capital or the dividends and income cash flows?" said Fasso. "Do they do a 10-year hedge, which can be very expensive? They are used to things being automatically hedged inside fund structures or equity portfolios, but not inside real assets. They have not got their heads around this yet.”

He said the typical ticket size for segregated accounts was $100 million “to get a bit of diversity”.