Institutional investors continue to build real assets exposure, says Aviva Investors report

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Global institutional investors are set to prioritise investments into real assets over the next 12 months, as the Covid-19 pandemic continues to have a lasting impact on global economies and financial markets, according to the latest edition of Aviva Investors’ Real Assets Study.

The Study, based on responses from over 1,000 decision-makers at insurers and pension funds representing over EUR2 trillion of assets under management, found that 49 per cent of insurers and 37 per cent of pension funds are expecting to increase their allocation to real assets investment strategies.

When asked which real asset markets they expect to increase allocation to over the next 12 months, both insurers and pension funds (54 per cent and 45 per cent respectively) identified real estate long income as their preferred asset class. Beyond this, insurers highlighted the desire to increase their exposure to debt strategies, with infrastructure debt (48 per cent), real estate debt (46 per cent) and private corporate debt (46 per cent) all expected to see increased investment. Pension funds demonstrated a similar view, expecting to increase their exposure to real estate debt (39 per cent), private corporate debt (39 per cent) and infrastructure debt (37 per cent).

Mark Versey, Chief Investment Officer, Real Assets, at Aviva Investors, says: “The findings from the latest edition of our study reveal fascinating trends in the appetite for real assets from institutional investors. Cashflow-matching continues to be the key criteria for insurers and pension funds around the world, as these investors increasingly recognise the resilience that real assets can offer their portfolios. This is being seen not only through consistent – and often inflation-linked – cashflows, but also via enhanced yields relative to more traditional asset classes and lower volatility. With central banks looking set to keep base rates low for the foreseeable future, our expectation is that institutional investors will increasingly turn to real assets for yield, returns and diversification.”

Despite significant numbers of office workers set to work remotely for the foreseeable future, 57 per cent of insurers and 53 per cent of pension funds surveyed feel that the long-term trend of working from home will provide the greatest opportunity for real assets investing. This was closely followed by data-centre growth (51 per cent of insurers, 43 per cent of pension funds), alongside growth and change in the logistics sector, where 49 per cent of insurers and 43 per cent of pension funds see opportunities.

“Whilst Covid-19 clearly had an immediate and profound impact on the built environment, many investors have seen these changes as the acceleration of existing structural shifts. Investors are seeking out opportunities caused by these changes, such as the increased reliance on digital infrastructure from those working remotely and the growing importance of logistics assets as demand for ecommerce expands.”

Reflecting the pace at which ESG integration across markets is maturing, insurers (59 per cent) and pension funds (56 per cent) both view the transparency of ESG investment approaches as the most important thing they look for in an asset manager. The Study also reveals a continued increase in focus on social responsibility by real assets investors. Including healthcare assets in portfolios was a factor for 55 per cent of insurers and 45 per cent of pension funds; investments in social housing (51 per cent of insurers, 42 per cent of pension funds) and education (46 per cent of insurers, 42 per cent of pension funds) were also seen as important.

Given the increased efforts of investors to align their portfolios with net zero emissions targets, there was continued support for investments that make a positive environmental impact; 58 per cent of insurers and 48 per cent of pension funds looked towards ‘energy-efficient real estate assets’.

Overall, the majority of both insurers (77 per cent) and pension funds (64 per cent) agreed cashflow-matching was the most important requirement for their real assets strategy, followed by capital preservation (60 per cent of insurers; 52 per cent of pension funds). Inflation-proofing was also cited as an attractive feature by 55 per cent of insurers, whilst access to illiquidity premia continues to be a significant draw for 51 per cent of pension funds.

The research also found that:

• Regulation is the biggest hurdle to real assets allocation for insurers (46 per cent), whilst pension funds are most concerned about illiquidity (41 per cent);

• Pension funds lag behind insurers on net zero portfolio targets, with only 47 per cent having a commitment in place, and just 33 per cent aiming to achieve net zero by 2050. Conversely, 72 per cent of insurers have firm commitments in place, of which 44 per cent have committed to doing so by 2050;

• 44 per cent of insurers and 36 per cent of pension funds see financial instability as the most likely concern for their investments over the next 12 months;

Asked when they expect their own economies to recover to 2019 levels, global institutional investors broadly agree on the end of 2022 or the beginning of 2023, with European investors the least optimistic by favouring spring or summer 2023 and those in North America at the other end of the spectrum, predicting June 2022.