Interest in less-liquid assets soar amid threats of coronavirus-driven recession
With their faith in basic investment strategies shattered, investors are turning to less-liquid private alternatives — potentially charging into the center of a deepening recession along the way.
JPMorgan Asset Management and Fiera Capital are among those touting the virtues of things like private equity, property and infrastructure in the wake of March’s broad market crash. BNY Mellon says it’s helping managers line up new funds targeting unlisted assets.
Yet these are exactly the type of investments now feeling the full force of the economic crisis brought on by the lockdown of swaths of the world’s population to contain the coronavirus. Some speculate they’re just starting the worst slump in years, spelling trouble for anyone late to the private-asset party.
“It’s no good to be saying in the middle of the crisis that I now need to diversify into real estate or infrastructure,” said Nikesh Patel, the head of investment strategy at Kempen UK. “Because in these markets, the crisis hasn’t happened yet.”
Blame March’s side-by-side collapse in stocks and bonds for the latest push into alternative assets, a corner of the market destined to be worth $21 trillion by 2025 after adding about $1 trillion a year since 2015, according to PwC.
Classic investment styles — the backbone for pension funds and retail investors the world over — work because stocks pegged to growth are counterbalanced by bonds that protect during a downturn. Broken markets in March exploded this basic investing tenet, with strategies balancing 60% stocks against 40% bonds posting their worst returns since the 2008 financial crisis.
Many are seeking an answer in private assets. Their returns are uncorrelated to public markets. And while they’re illiquid and hard to exit, monthly or even quarterly valuations mean they’re more likely to escape the kind of volatility that kills portfolio returns.
“Real assets with reliable non-cyclical cash flows are likely to receive renewed attention from asset allocators,” John Bilton, head of global multi-asset strategy at JPMorgan Asset Management, wrote in a note at the end of April highlighting benefits of private investments.
The trouble is, many are cyclical — and vulnerable. For instance, social-distancing measures will keep consumers away from shopping malls and office workers cloistered in their homes even after lockdowns ease, which could be bad news for the real-estate sector.
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“These are GDP-sensitive assets and you’ll be waiting for some time to get your money back,” said Patel. “The fallout in real estate hasn’t yet happened, it’s going to be upended.”
Liquidity is another issue. In March’s crisis even positions in the safest government bonds were hard to exit. By definition, private assets don’t trade on an exchange, meaning investors may be in for the long haul.
Even proponents acknowledge they’re in for a period of short-term pain before reaping rewards. Capital values for real assets may be marked down as much as 10% in the aftermath of the pandemic, according to JPMorgan Asset estimates.
But these investments may also enjoy a bigger boost in the recovery, like in the decade following the financial crisis, Bilton argues. Logistics are among the stable industries likely to lead a recovery with cyclical sectors following, he says.
While the full economic impact of the pandemic is still unknown, the few gauges available for private assets already show that returns this year aren’t encouraging.
Real estate investment vehicles are down about 26% in 2020. The S&P BDC Index, which tracks the listed arms of some of the U.S.’s largest private credit lenders, has lost about 37% in the same period.
“Long-term investors will benefit but the short-term income could be negatively impacted if you have exposure to GDP-sensitive assets,” said Francois Bourdon, global chief investment officer at Fiera Capital, a $170 billion Canadian asset manager. His firm prefers food stores over shopping malls, telecoms over infrastructure loans to airports, toll roads and ferries, and is steering clear of management agreements on hotel property.
A wave of mall closures and unpaid rents has been mostly built into market assumptions, and in the end may underestimate the burst of activity by populations freed from restrictions on movement and public spaces, according to Brian Levitt, global market strategist at Invesco.
“We are social creatures at the end of the day,” Levitt said by phone. “So I think at some point, the market gets ahead of itself, in thinking we’re only going to shop and work from home. I think that’s overstating.”
Over the next 10 to 15 years, JPMorgan Asset projects annualized returns for real estate increasing by as much as 100 basis points, and by about 70 basis points for infrastructure.
And with return targets growing ever more-elusive as yields on developed government debt converge towards zero, many more are willing to take their chances with private debt and equity.
“We’re seeing dislocation funds, new funds based on trigger money coming in and we’re seeing interest in new mortgage backed-real estate funds,” said Peter Salvage, global head of credit fund services at BNY Mellon. “It’s been a very busy month for us.” — Additional reporting by Morwenna Coniam