With global inflation running hot, assets that can preserve the real value of investors’ capital are more relevant than ever. ‘Real assets’ such as property, infrastructure, renewable energy infrastructure, farmland and forestry and leasing are often thought of as offering protection against rising prices. Investment companies investing in real assets now manage £56 billion.
The Association of Investment Companies (AIC) has spoken to investment company managers from four sectors: Infrastructure, Property – UK Commercial, Property – Europe and Leasing about how they are handling rising inflation, the risks of inflation to their asset class and where they are finding opportunities.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Real assets can offer diversification to portfolios, as well as some inflation protection. However, they are hard to access in daily-dealing open-ended funds, as the suspension of many property funds during the pandemic reminded us. The investment company structure provides a tried-and-tested way of accessing these assets while being able to trade your shares whenever the stock market is open.
“Investment companies investing in property and infrastructure have been around since before the financial crisis. The infrastructure sector has delivered strong returns of 196.6% over the past ten years and has a relatively stable yield of 4.6%. The pandemic clearly had an effect on some companies in the UK Commercial Property sector which has delivered a return of 87.8% over the past ten years and has a yield of 4.6%.”
How are real assets providing protection against inflationary pressure?
Phil Kent, Manager of GCP Infrastructure Investments, said: “52% of GCP Infrastructure’s portfolio of investments has some form of inflation protection, meaning that in a higher inflationary environment, the income generated by the portfolio will also increase. This provides investors with a hedge that protects their returns from the impact of higher inflation on discount rates and valuations. By way of an example, the updated, higher Office for Budget Responsibility (OBR) inflation forecasts published in October contributed a one pence per share uplift in the published net asset value of GCP at the end of December.”
Simon Lee, Co-Manager of LXI REIT, said: “Our portfolio is expected to continue to deliver attractive, defensive inflation protected income returns and capital growth to our shareholders going forward, in part as our portfolio has 96% of rental income index-linked or fixed uplifts. Inflation-linkage is just part of the creation and protection of value and outperformance that we deliver for our shareholders over the long term.
“We acquired our portfolio predominantly off-market through pre-let forward fundings and sale and leaseback strategies, at an attractive average net initial yield of 5.6%, which is 110 basis points above our current portfolio valuation yield of 4.5%. Our portfolio also has a long weighted average unexpired lease term to first break of 22 years. It is 100% let or pre-let to over 70 institutional-grade tenants with strong financial covenants across a range of defensive and structurally supported sub-sectors sectors, including grocery and industrial.
“Meanwhile our recent acquisitions have further diversified our portfolio, including areas such as life sciences and education, and clearly demonstrate our ability to create additional value for shareholders by sourcing attractive opportunities.”