Diversification is a key part of successful multi-asset investing, and real assets offer attractive benefits in achieving this. By ‘real’, we mean tangible assets such as buildings, toll roads, solar and wind farms, and commodities like energy, livestock and grains which derive value from their availability and usability by consumers and businesses.
Liontrust’s MA Diversified Real Asset Fund (DRAF) invests in liquid real assets across a broad set of alternative sectors, such as infrastructure, renewables, gold and commodities, and gains exposure to property via specialist REITs. Not only do we think REITs provide greater and more reliable inflation hedging, but they also reduce the volatility of owning standalone property exposure. We do this in a daily dealing liquid format.
Given this context, what is our view of property as an inflation hedge? First of all, the good news is that property is linked to inflation via the indexation of leases. This allows rents to be explicitly linked to the two measures of CPI (Consumer Price Index) or RPI (Retail Price Index).
There are issues to be considered when investing in property, however. The inflation indexation may be done annually, or less frequently on a three-year basis, as well as at the time of lease renewal. This can result in a lead-lag relationship between how inflation feeds into year-on-year rental growth for the property company and the actual inflation that we observe today.
Not all leases will be indexed and some will be subjected to fixed uplifts and open market reviews, which is determined by supply and demand factors. If the inflation period coincides with an economic downturn, as we are seeing right now, the ability of landlords to negotiate an index-linked rent rise on the non-hedged portion diminishes, and the inflation linkage may be less strong.
The ability to pass through rental increases (for open market review leases) is also a function of particular sector dynamics. For example, we have seen greater pricing power versus other sectors in the logistics sector, which is undersupplied relative to demand.
From an investor’s perspective, it is also important to ensure that the cost basis is not rising faster than the top line income growth. This may be the case for highly levered property companies with a higher percentage of floating rate debt – the cost of which will also rise with inflation as interest rates rise. Therefore, an active and selective approach is needed.
Additionally, it should be noted that in the short term, macroeconomic factors such as rising rates and slowing economic growth can have a much more meaningful impact on share price valuations than the inflation protection element of the leases. Over the long term, we expect property to act as an inflation hedge, but in the short term this may not be the case.
Finally, the way investors access property can have an impact. For example, REITs offer daily liquidity but may have higher short-term volatility from time to time, while open ended property funds have faced a multitude of gating issues. In our view, the illiquidity in these funds becomes a more important consideration than any inflation hedging properties.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Some of the Funds and Model Portfolios managed by the Multi-Asset Team have exposure to foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The majority of the Funds and Model Portfolios invest in Fixed Income securities indirectly through collective investment schemes. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. Some Funds may have exposure to property via collective investment schemes. Property funds may be more difficult to value objectively so may be incorrectly priced, and may at times be harder to sell. This could lead to reduced liquidity in the Fund. Some Funds and Model Portfolios also invest in non-mainstream (alternative) assets indirectly through collective investment schemes. During periods of stressed market conditions non-mainstream (alternative) assets may be difficult to sell at a fair price, which may cause prices to fluctuate more sharply.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
