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Aviva: global allocations to real assets to increase over the coming 12 months

The findings, based on the responses of 500 insurance and pension fund investment decision-makers, found that 51% of insurance and 37% of pension fund executives expect their investments in real assets to increase. With uncertainty over global growth and the likelihood of interest rates remaining lower for longer, institutional investors continue to look at private assets for diversification and potential illiquidity premium over public markets.

Both insurers (44%) and pension funds (38%) said escalating trade wars were a concern to their real asset investments over the next 12 months, whilst the continued lack of clarity over the future relationship between the UK and the European Union was also a concern.

The findings also emphasised the increasing importance investors place on environmental, social and governance (ESG) issues and the desire to demonstrate that real assets have a broader benefit than financial returns.

Nine in 10 respondents said they consider ESG to be important in investment decision making, and of these, 40% of insurers and 42% of pension funds consider a ‘favourable ESG impact’ of Real Assets to be integral. Insurers are also more likely (50%) than pension funds (41%) to consider the ‘transparency of asset managers’ ESG investment approach’ when looking at external investment providers.

Investors also highlighted a preference for multiple strategies within real assets allocations. Direct real estate (53%), infrastructure equity (53%) and structured finance (52%) are pension funds’ most sought after strategies, while over half of insurers expect to increase investments in real estate finance (54%), infrastructure equity (52%) and structured finance (51%)

The research also found that:

  • 43% insurers and 40% pension funds raised fears that ‘regulatory interference’ was proving challenging to investment activities. Both groups (37% of insurers and 30% of pension funds) cited the lack of regulatory harmony across Europe as a concern.
  • 49% of insurers and 45% of pension funds perceive ‘financial instability’ as the most likely and concerning event for real asset investment over the next 12 months.
  •  30% of insurers and 26% of pension funds believe ‘difficulty finding suitable opportunities’ is the biggest barrier to investing in real assets or increasing existing allocations.

Mark Versey, CIO of Avia Investors Real Assets, said:

“Strong appetite for Real Assets is unsurprising given the continued global backdrop of political and economic uncertainty. As well as offering investors cashflow-matching characteristics and added diversification, returns for the sector have been dependable and buoyed by the illiquidity premia they can offer.

“The growing influence of ESG is another undeniable trend, however the lack of readily-available information can create difficulties in quantifying the ESG credentials of a project. This makes integration complex and something that must be undertaken on a case-by-case basis.

“The boundary between infrastructure, real estate, and private debt is increasingly blurred. Investors are looking for multi-asset portfolios with an outcome-oriented focus, whether that be growth, long income, or predictable, inflation-matching cashflows. New entrants and rising allocations from existing investors increase the risk of overcrowding and of returns being squeezed in well-trodden areas of the market. Investors need to consider this when building strategies to ensure they achieve the best possible outcomes.”

james.wallace@realassetmedia.com