Real assets allocations on the rise: Aviva

Yasmine Raso

Senior Journalist, Financial Newswire

27 January 2023

Aviva Investors’ Real Assets Study 2023 has revealed the number of investors with real asset allocations to generate inflation-protected income has climbed from around 33 per cent three years ago to 53 per cent.

The study also found real estate equity continues to be the preferred real assets strategy, while infrastructure equity showed signs it was on its way up after a one per cent increase over the last two years.

Daniel McHugh, Chief Investment Officer, Real Assets at Aviva Investors, said its ability to protect income from the impacts of inflationary pressures had become the “dominant driver” behind the rise in real asset allocations.

“Inflation had an acute impact on the economic and investment landscape in 2022, making it increasingly expensive to hedge against it through traditional asset classes, whilst rising interest rates have eroded returns,” he said.

“The ability of real assets to provide inflation-linked income has woken investors up to the attractiveness of these strategies beyond simply being a diversification play. They are now playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in.”

The report also showed more investors are using real asset allocations to make more of a positive environmental, social and governance (ESG) impact, growing by 11 per cent to 28 per cent. Despite this increase, the data found a difference between regions; 33 per cent of investors in Europe and Asia compared to only 10 per cent of North American investors possess real assets for its contribution to positive ESG outcomes.

“The Study shows that demand is also being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability-related objectives,” McHugh said.

“Whilst concerns about high valuations feature prominently in this year’s responses, just 22 per cent of institutional investors see climate-related obsolescence as the most material risk. Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors.

“That has to change. As the market looks at assets through a net-zero lens, even prime assets could become vulnerable. Investors must be alive to how quickly – and to what extent – obsolescence could accelerate and the potential impact it could have on portfolios.”