What role can liquid real assets play in a multi-asset portfolio?

Liquid real assets have a large role to play in multi-asset portfolios. Their revenues tend to be very lowly correlated with the economic cycle, so provide a good buffer for a multi-asset portfolio to gain diversification. In fact, the correlation with both equities and bonds tends to be quite low.

Can you give us an example of how you use investment themes to avoid areas of risk and identify opportunities?

Investment themes at Newton are really used to identify risks and areas of opportunity. They are meant to guide our analysts and fund managers into the areas that are beneficiaries of tailwinds, and help us avoid the headwinds.

As an example, our ‘Earth matters’ theme helped us to identify renewable-energy assets early on before the wider market was aware of the opportunity. It also helped us to avoid areas such as catastrophe bonds and insurance-linked securities. When the occurrence of natural disasters has increased over the last couple of years, we had seen this earlier on as an area of risk given our move and the focus of ‘Earth matters’ on climate change. The fact that a one-metre rise in the sea level leads to a 300-metre move in the coast line, helped us to identify some of the risks that have perhaps not been caught in the models when you’re looking at catastrophic events.

Can you tell us more about renewables?

The demand for renewables will continue to remain high as we look to decarbonise our power generation across the globe by adding new renewable-energy assets. One of the benefits we’ve had from the early adoption of renewable energy is the government-guaranteed subsidy regime that helps to provide very stable revenues, to be able to pay stable dividend streams and provide stable returns for investors.

Some of the things that we like about them is that 50-60% of revenues come from government subsidies which are fixed and inflation-linked. That inflation linkage helps to protect us when central banks continue to push to try and generate some form of inflation in the general backdrop.

The last characteristic that we like is the fact that the electricity price isn’t dependent on the economic cycle either. So whilst the electricity price can move up and down, it tends to be uncorrelated with the economic cycle. Putting all of these together provides a very robust revenue stream and stable asset class that is uncorrelated with equities but also, due to the inflation linkage, provides an uncorrelated asset to bond markets as well.

Portfolio manager Paul Flood discusses the role of liquid real assets in a multi-asset portfolio

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