With the current volatility in markets, there is increased interest in exploring more defensive asset classes, according to Jana Rietow, product specialist liquid real assets at DWS.
“We’ve seen that the sentiment of investors has changed and a lot of investors are deviating from their traditional multi-asset portfolios that are usually equities and bonds, with the equity portion typically being invested in the MSCI and therefore have a high exposure to tech. With listed infrastructure, listed real estate, and to some extent also commodities, you get a full set of new risk-return drivers,” she says and adds that listed infrastructure and listed real estate also benefit from long-term leases.
“These businesses typically generate their returns or cash flows on long-term contracts. That provides very predictable and stable cash flows,” she says. She adds that it shouldn’t be seen as a substitute for equities, but it’s very complementary – especially in the volatile markets as we see today.
Asked what investors might be missing by investing in liquid infrastructure instead of private, or unlisted, infrastructure, Jana Rietow says that there of course is room for both.
“It really depends on the client sentiment. When we talk to investors, we usually also promote a combined approach, because these are complementary investments. When it comes to infrastructure, on the direct side you get a lot of renewable energy generation, whereas on the listed side, the focus is more on the utilities. Of course, with listed infrastructure you get liquidity and it also provides flexibility. The benefit when investing directly is the proximity to the assets and that’s what some clients like. There’s also lower volatility, at least lower perceived volatility, because on the direct side valuations are not as frequent as on the listed side. I mean, with listed, it’s an equity investment still. You get daily valuations, so it’s more volatile for the short term. However, the correlation picks up the longer you look at it. If you look at three-year numbers, the correlation is already at 0.7 and that makes sense because we’re still looking at the same underlying assets,” she says.
Asked if there can be a valuation gap between listed and unlisted infrastructure, given the less frequent pricing, that can be exploited, Jana Rietow says there is and that it varies over time and across regions.
“In Europe, even though we have seen an increased interest in infrastructure and even if the European segments have been performing better last year, listed infrastructure are still very undervalued compared to direct infrastructure. So, this could be a good entry point,” she says. With regards to the most common questions she gets from investors, Jana Rietow says that it typically centers on the potential inflation hedge and also downside protection – especially in volatile markets. Asked if the potential inflation hedge is similar in listed and unlisted infrastructure, Jana Rietow says that it’s about the same. “Some 90 per cent of the companies in the investable universe provide some sort of inflation passed through,” she says.
