Property and Infrastructure have been important alternative asset classes within our Strategic Asset Allocation (SAA), but following a thorough review, we realised it was time for a change.
How did we get here?
Multi-asset investors are always on the lookout for ways to diversify away from traditional equities and bonds, without having to sit in cash for the long-term. However, the pursuit of an additional asset class has led to many dead ends. Whether physical property or absolute return, passive or active, open-ended or investment trust, recent history is littered with failure.
How do we approach the problem?
Simple, transparent, low-cost. We are guided by this mantra, and won’t invest in asset classes that fail to meet it. We also want the asset classes that form the core of our Strategic Asset Allocation (SAA) to have adequate scope to invest both passively and actively.
Our portfolios have used Property and Infrastructure as ‘Alternatives’. (Notice the past tense.) The property SAA benchmark contained a mixture of UK REITs and shorter-dated index-linked gilts. The latter were used to dampen the inherent leverage and volatility of REITs, whilst tying back to the intended outcome of providing a long-term real return.
The Infrastructure angle was simpler, as it comprised of a global listed Infrastructure benchmark. The underlying cashflows of such companies are typically linked back to inflation in one way or another, thereby offering the opportunity to capture a real return.
Why change?
We regularly review our SAA structure to probe for weakness and find enhancements. In 2023, that led to us removing certain sectors, which we reserved for tactical use instead.
Throughout 2024 we pondered the journey of UK property, more specifically REITs. Trends come and go – for example, shopping-centres and large retail outlets were popular before the global financial crisis, but online shopping has since plundered their value. Similarly, high-grade offices came into fashion, but were then rocked by the pandemic and hybrid working. Out-of-town retail also had a brief spell of success as people were forced into more open spaces amid the pandemic. Warehouses and logistics assets, both small and large format, have been popular for a while.
All this led us to assess what we receive from Property as an ‘alternative’ asset, principally looking through the lens of correlation, drawdown and real return. We found that, at an asset class level, ‘property’ in a simple, transparent and low-cost form, failed all our tests. To us it appears to be just another pro-cyclical asset class that we’ll look at tactically from now on. That isn’t to say that investors can’t be successful by using it, but for us it does not warrant a place within the core SAA optimisation process.
Infrastructure is more nuanced. It has failed to offer diversification benefits on several occasions in the past, and has produced drawdowns greater than that of the global equity market. As with property, we consider Infrastructure to be just another equity sector, albeit sometimes lower beta.
As a result, we have removed Infrastructure and Property from the core optimisation process, but will consider them tactically going forward. This January we have therefore removed Property from portfolios. The capital has mainly been reallocated to global equity markets.
The value of investments can go down as well as up and your client may not get back their original investment.
Past performance is not a guide to future performance and some investments need to be held for the long term.
