Real asset investors should be aware of limitations
Investors interested in real assets should know the limitations of this asset class to better exploit growth potential, according to Zenith Investment Partners’ sector review.
The review found lower volatility that characterised real assets, which generally comprised private market (unlisted) investments, could create a paradox for unwary investors.
Dugald Higgins, Zenith’s head of real assets and listed strategies, said that reducing volatility was not the same as reducing risk.
“Risk should be viewed as permanent capital loss, not volatility. Structural aspects of real assets such as long investment timeframes, illiquidity and leverage, work to heighten complexities and risk at the individual fund level,” he said.
Aside from real assets fundamentals, one of the most powerful diversifying attributes was the low correlation to liquid assets. However, Higgins warned, a significant driver of this characteristic was low liquidity with fund liquidity generally mirroring that of the underlying assets.
“While sacrificing liquidity can be profitable, liquidity mismatch is inherent for vehicles that offer short-term redemptions while investing in long dated assets,” he added.
Over the 12 months to 31 October, 2019, Zenith’s universe of rated real assets funds returned an average of 10.65% p.a. over five years (net of fees) with an observed volatility of 3.6% p.a.
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