Transcript: In a world of inflation and supply shocks, real assets make real sense
Vince Childers of Cohen & Steers says real estate, infrastructure, commodities, and resources make for a well-diversified real-assets allocation
- October 3, 2023 September 28, 2023
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about real-asset investing with Vince Childers, senior vice president and head of real assets multi-strategy at Cohen & Steers. We talked about building a portfolio using real assets, inflation sensitivity and we started by identifying the real-asset categories he’s most interested in.
Vince Childers (VC): I’m going to be focused primarily on liquid, listed exchange-traded real-asset opportunities, globally. So basically, scouring the global listed markets for exposure to securities and industries and sectors and assets that we think can have attractive inflation-sensitivity dynamics. There are actually a lot of securities, industries and sectors that fit the bill. But if we need to boil them down to those that I think really are at the nexus of the real-assets opportunity, it is the core four. And that’s global real estate, exposure to commodity futures, investments in resource equities and listed infrastructure. And so, I think if you think of those core four groups, you’ve got a pretty solid idea of what kind of things makes sense in a broader diversified real-assets allocation.
Ranking the inflation sensitivity of his ‘core four’
VC: If we want to, kind of, rank order inflation sensitivity, it tends to be the highest in the commodity futures themselves. Basically, right there, at the beginning of more or less every supply chain. Right behind commodity futures are the resource equities. Infrastructure will tend to be a little bit less inflation sensitive than the resource equities. And, honestly, real estate will tend to have the least inflation sensitivity in the real-asset universe.
What real-estate investments he’s leaning towards
VC: Yeah, right now, I think, relative to benchmark, we favour residential and healthcare and even a little bit of retail. Our biggest underweight is in office, for fundamental reasons that probably aren’t too surprising to too many people. You know, we worry about the future of a lot of office, and whether or not fundamentals are fully reflected in current prices.
Why resource equities have caught his eye
VC: What I like about resource equities right now is what I think is a pretty compelling valuation opportunity. They’re more focused on capital returns, cap-ex discipline. I think the market is still distrustful that this kind of change in mindset and this focus on generating economic value will persist. We’re optimistic about it, and we think these valuations make the resource equity universe look particularly attractive right now.
About infrastructure investments
VC: There are so many different types of businesses in the infrastructure universe. On the whole, they look actually, pretty attractively valued. Not the sexy thing at the moment. Overlooked by the market. Growth fundamentals actually look pretty solid to us.
VC: Of the real assets, commodity futures, pretty reliably, that exposure is going to have the biggest inflation sensitivity that you can bring into a portfolio. You’re talking about assets that are at the foundation of what makes the economy move at all. Commodities also tend to be the most diversifying element in the real-assets universe, the lowest beta to equities and very little sensitivity or correlation to, say, fixed-income returns. So, they’re just a huge diversifier. There’s always a place in a real-assets portfolio for some kind of commodity futures exposure.
And finally, why real-asset investing is a savvy strategic move
VC: This comes to the concerns we have about the years ahead, you know, maybe the decade ahead or more. We could very well find ourselves in a new economic regime that is characterized more by negative supply-side shocks hitting the economy, and creating downside surprises to growth and upside surprises to inflation. And if you understand how damaging that type of environment could be, well, these assets are something that you should have in your portfolio on a long-term, permanent, strategic basis. So, if you put any weight on a risk case that says bouts of stagflation could plague us in a way that we have not seen in a very, very long time, this is probably the asset class that would stand to benefit the most in that type of world.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Vince Childers of Cohen & Steers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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