Industry Voice: Balancing steady yield with diversification through real assets


Caspar Rock, head of Architas Multi-Managers

architas-logo-cmykWe did some research around the use of alternative investments and the feedback from consumer testing was they were unsure where to invest, or how to invest in alternatives. So we built the Diversified Real Assets Fund that gives you diversified exposure to a range of real assets.

This Fund has three objectives: the first one is to give you diversified exposure rather than putting all your eggs in one basket; the second one is to have a targeted yield of around 3.5%; and the third one is to provide an element of inflation protection in that yield.

We've created a portfolio with a diverse range of investments, each with individual return drivers that are very different from other things within the portfolio. So, for example, we've got things like infrastructure projects, renewable energy, doctors' surgeries, and student property.

Each of these individual asset classes generates their revenue through different means. We've tried to create a blend which exceeds our target of above 3.5%, and also many of these investments have an element of inflation protection in their revenues.

Individually these investments have got low correlation to equity and bond markets, and we've combined them in a portfolio to ensure that at an overall level we've also got a low correlation to equities and bonds as well.

I think it really important to emphasize that we look for alternative assets whose underlying driver of returns is different from the stock market or the bond market.

If you take something like ground rent, where there's a very clear inflation-linkage, they may from time to time be valued on that, on the long-term cash flows, and that's the important thing, but the underlying driver of it is not really the global economic cycle.

Then from a more mathematical point of view, the two things we worry about is the level of correlation to either equities or bonds, or both, and the second thing, and I think it's very important, is actually what's interesting is looking at the individual assets we hold within the Fund, is they have low correlation between each of them. So you're ending up with two levels of diversification rather than just one.

We have been asked if investors are giving up some potential return because of the inflation protection elements within the portfolio?

I think it's always wise to be prepared for what you don't expect, and I do think that at some stage you will get some inflationary pressures coming back in the market. I don't know when, but I think it's right to have an element of preparation in it.

And within the Fund, we have different ways of playing the inflation protection theme. So you can buy infrastructure assets or some ground rents or other assets like them where there is a direct linkage to CPI or RPI.

You can then also buy assets that have quite a close link to the economic cycle, because generally when the economic cycle picks up, over time, inflation picks up. And then the third type of asset we do have a preference for is floating rate income, because as inflation picks up, interest rates generally pick up.

I think the fund has an appropriate place in a lot of portfolios. Historically, the sort investment it holds were really used by private banks and you needed £1m, or more to buy into them. What we're trying to do is to democratise it to allow many more people to gain a diversified access to these asset classes.

We're not here to give the advice on how much you should invest in it, but what we're trying to say is here is a diversified exposure to alternatives that is appropriate to be used as a part of a multi asset portfolio. The Diversified Real Assets Fund is really a pure exposure for people to use as a building block.

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