In recent years, slow and steady hasn’t won the race for global returns, with surging megacap growth stocks leading the way. All the more reason, some fund managers say, to consider complementary strategies to the technology-heavy global markets.
One such alternative is to emphasize “real assets.” These are industries or sectors such as materials, energy, utilities, infrastructure and real estate. Depending on the portfolio manager, a real-assets fund may also have direct exposure to gold, oil or other commodities.
“Valuations are getting quite rich in the tech space, and investors are starting to look elsewhere in broadening out their views,” said Chris Cullen, senior vice-president and head of ETFs with Toronto-based Brompton Funds Ltd. “We see real assets as a natural fit.”
The Brompton Sustainable Real Assets Dividend ETF is one of a handful of ETFs that, by name and by mandate, invest in companies with huge investments in physical assets such as power plants, or have access to large deposits of natural resources.
Some types of real-assets companies have a “moat” around their business that makes competing with them very expensive, Cullen said. For example, “if you were to start up a telecom company out of nothing and try to build out the infrastructure, we’re talking billions and billions of dollars.”
Regulated rates of return may also provide a margin of safety to investors in companies such as utilities and pipelines, if they have inflation clauses in their contracts.
Other such funds include the Purpose Diversified Real Asset Fund, which invests in both stocks and commodities and is heavily weighted toward agriculture-related industries, and the CI Global Real Asset Private Pool, whose weighting is 50% infrastructure and 50% real estate.
Meanwhile, the Russell Investments Real Assets ETF series employs a multi-manager strategy. Its portfolio was recently composed of 41% in real estate, 35% in infrastructure, 15% in an inflation-linked bond fund and the remainder in a commodity index fund.
The newest real-assets ETF offering is the AGF Global Real Assets Fund, which became available as an ETF series on Feb. 27. Previously a precious metals and natural resources strategy, the fund broadened its mandate in April 2019 to embrace companies associated with real assets.
“The concept was to create a product that could provide meaningful positive returns through the entire [business] cycle, and yet give you the protection you needed through periods of either high or rising inflation, or recessionary stagflation periods,” said Steve Bonnyman, vice-president, portfolio manager and head of equity research with Toronto-based AGF Investments Inc.
Bonnyman, who manages AGF’s global real-asset portfolios, said the fund’s target weighting is 90% equity and 10% fixed income.
The bond portion consists primarily of corporate securities issued by the types of companies that fall within the fund’s equity mandate.
Recently the equity holdings were heavily concentrated: 43% in energy stocks and 29% in the materials sector, something of a throwback to AGF’s original resources mandate. It’s a tactical shift that has paid off as commodity prices have risen.
In crafting the portfolio, Bonnyman and his colleagues make macroeconomic forecasts and assumptions, and employ screens for quantitative, fundamental and technical criteria.
“Everything which shows up as having positive biases through those three [screens] becomes what we call our tactical universe,” he said. “We’re really looking for mispriced securities. And they could be mispriced and identified through a variety of means.”
The AGF team, which includes portfolio manager Jeff Kay, also makes selective use of covered calls, commodity futures and precious metals. When investing in gold, Bonnyman said, “we may move back and forth between the equities and the metal, depending upon where we see the best risk-return.”
For investors, Bonnyman does not view the fund as tactical in nature, since timing market trends is difficult. “The way we built this, the structure around it, is designed to ensure that you have a positive experience through the full cycle.”
Since the fund’s mandate expanded, it has produced positive returns each calendar year since 2019. Returns ranged from 0.6% in 2020 to 16.9% a year later.
Brompton’s real-assets ETF is equity-focused and does not hold commodities or commodity futures. But it also has an income element: the investment team, led by chief investment officer Laura Lau, will typically write covered calls on 15% to 30% of the portfolio holdings.
As a result, the ETF’s recent distribution yield was 4.8%. “A lot of people are looking for that kind of income, especially older people who are in their retirement years,” Cullen said.
Brompton’s investment process incorporates a top-down analysis to determine which types of real-assets sectors to emphasize. Recently the ETF’s largest exposure was 38% in industrials, followed by 23% in energy and 19% in utilities.
Cullen said the Brompton team seeks companies with the right amount of leverage to generate cash flow and cover their borrowing costs.
The Brompton managers also look for efficient operators that are dominant in their sectors, have advantages over competitors, and have growth opportunities. “And they’re looking for bargains, looking for the right pricing,” Cullen added.
Additionally, given the Brompton ETF’s positioning as “sustainable,” Brompton selects companies with higher ESG scores in carbon-generating sectors like oil and gas. “A lot of pipeline companies have carbon-capture programs, for example,” Cullen said.