Real assets offer pension funds real opportunities

Secure income real assets are showing resilience in the face of higher interest rates, according to a recent paper from Alpha Real Capital.

Equities and public market credit assets have posted negative returns in the year to date (of around 18% and 15% respectively), yet secure income real assets have held their value, said the paper. This is partly because the assets are inflation linked, and also because investors have been shifting to higher quality credit, among others.

Spreads above risk-free rates “remain compelling”, said the authors, with investors receiving two to three times the spread available from comparable public market credit on average.

With funding levels improving there is more scope for pension schemes to move towards or adopt full cashflow driven investing strategies. This in turn will increase the certainty of schemes meeting their endgames of buy-out or improving their position with regard to self sufficiency.

The report concluded: “Despite the volatile markets, higher real rates mean most pension schemes have healthier funding levels.

“This means they may be looking to derisk into cashflow generating assets that offer good returns and also reduce the burden on their LDI (liability driven investment) portfolios to hedge liabilities.

“If spreads continue to be attractive versus the risk/return offered by alternative cashflow generating assets then higher demand could support commercial ground rent prices.”