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Opportunities in alternatives: Don’t waste a crisis
Diversification and resilience are key investment attributes for navigating volatile markets and an uncertain economic outlook. Alternative asset classes are a rich source of both. Experts from Nuveen and its affiliates share their views on potential opportunities for institutional investors.
Real estate: Diversification and income
Mike Sales, Head of Nuveen Real Estate and Real Assets
Every decade since 2000 has presented a financial and economic crisis – 9/11, the great financial crisis and now coronavirus. For us, this crisis is an opportunity to continue investing in property types, cities and tenants that are less sensitive to economic and financial cycles. This can translate to more exposure to well-capitalized tenants and stronger positioning around housing, health care and technology.
In the short term, commercial mortgages may be attractive. Trading should pick up toward year end, creating opportunities to buy high-quality assets at a discount to pre-crisis values.
Crises don’t break systems, but reveal what was already broken. In retail, we expect a move to even shorter leases and faster turnaround of space, with owners managing their assets much more intensively. Smart retailers are already reconfiguring in response to social distancing. And entirely new retail concepts will be borne out of this crisis as some retailers of yesteryear fade into bankruptcy.
The jury is out on offices. Will prolonged remote working mean less need for space overall? Or will returning to the office require more space per head? As we think about alternative office layouts, there will be demand for healthier, smarter buildings. And while we may see an end to hot desking, co-working businesses could find support from the need for flexible working spaces.
Most financial and economic crises destroy wealth, and COVID-19 is no different. Fewer households will be able to buy homes and more will have to rent, driving demand for apartments and single-family homes. Longer term, however, the living sector offers a range of opportunities, notably student accommodation given the strong education demand from emerging markets.
Growth in ecommerce will further support the industrial sector, though medium-term supply-chain disruption and border control could impact demand.
Real estate is not a short-term trade, but rather a strategic allocation that provides a powerful alternative to traditional public markets in portfolios. It offers diversification and attractive income streams compared with other asset classes in this lower-for-longer interest rate environment.
Real assets: Making a durable difference
Justin 'Biff' Ourso, Head of Real Assets
A greater appreciation of responsible investing as investors re-think ESG and sustainability issues will create opportunities in real assets.
Many investors were already deploying capital to express their values and/or for positive economic change. This will likely pivot to a focus on sustainability and durability. We expect global supply chains will be re-assessed, just-in-time manufacturing questioned and onshoring likely to increase.
Unfortunately, poverty, malnutrition and housing issues have increased because of the economic shutdown. Private equity impact investing, especially in emerging markets, can help address these challenges. Several options exist to channel this, such as investments in bank and non-bank financial institutions that support small businesses and low-income consumers, companies in the health care and education sectors, or affordable housing for low-income consumers in the U.S.
Another area of interest is U.S. agriculture, including farmland, which by its fundamental nature is resilient throughout economic cycles. We also see agribusiness companies that provide products and services oriented to the retail vs. foodservice segment and also directed to consumer channels emerging from the crisis stronger.
The coronavirus crisis is affecting different real assets in different ways. For example, in timberland, fiber demand for tissue and packaging remains resilient. Conversely, saw timber or wood products for homebuilding and finished goods, which are more sensitive to GDP, are challenged. Among infrastructure, those businesses less geared to GDP sensitivity like availability-based social infrastructure or digital infrastructure are performing well, whereas volume-based toll roads and parking are experiencing significant stress. Structure and positioning in the capital stack also matter. Real assets cover such a range of business and sectors throughout the economy that they naturally build portfolio diversity.
Agriculture: A different kind of cycle
Martin Davies, President and CEO, Westchester
We continue to diversify our assets by country, crop and operating approach, with a focus on sustainability. For us, that’s where we see opportunities.
Our top investment ideas are crop types benefiting from the renewed focus on health and nutrition, such as nuts, avocado and organic produce, and regenerative agriculture.
Consumers are now paying more attention to food sustainability and connecting diet and health amid the crisis. We see this through the increased consumption of organic food and box schemes from local suppliers.
But the asset class offers more than just food production for investors pursuing sustainable and responsible investing themes. There are additional opportunities for positive change with regenerative agriculture. This includes carbon sequestration in the fight against climate change.
The ability to diversify within agriculture means the asset class is doing what we expect – delivering stable returns. Leasing real estate assets to commodity-crop farmers may insulate a portfolio somewhat from commodity prices and market volatility. Exposure to the lockdown-induced labor force disruption may be limited by focusing on mechanized farming. Favoring non-perishable crops may also reduce supply-chain problems.
Agriculture generally moves in a different cycle from other asset classes, giving it significant diversification power. Its ability to generate income, hedge against inflation and even minimize floating-rate exposure, along with historical stable returns, underscore its resilience and appeal. We expect renewed interest in the asset class as a result of the crisis.
Private credit: Relationships matter
Ken Kencel, President and CEO of Churchill
Highly selective private credit managers who have continued to diversify their investments and steer away from more cyclical sectors will likely be in a better place than those more aggressively positioned. Portfolios with significant exposure to retail, restaurants, leisure, oil and gas will have taken a severe hit.
Like many other areas, private credit has seen a dramatic halt in deal activity. The focus has shifted to portfolio companies and understanding how they are dealing with the crisis. As long as we see sponsors being constructive and providing incremental capital where needed, our aim is to be a good partner and support otherwise solid businesses.
We expect a relatively short recession, compared with the financial crisis of 2008-09, but with a much steeper decline. This time, the banks and the financial system are in a much stronger position and governments have moved more quickly to provide support.
Liquidity will be key to capturing opportunities in private credit. Investors should work with managers who have scale, capital, strong relationships and the ability to act quickly. These managers will be best positioned to both support existing portfolio companies and benefit from attractive opportunities as they emerge, at what we believe will be better risk-adjusted returns than we’ve seen in years. The best time to deploy capital is often during the most challenging market environments.
We expect attractive opportunities in senior secured loans to sponsor-backed, middle market companies.
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The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate, agriculture or timber sectors makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
Middle market loan investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
This information represents the opinion of Nuveen, LLC and its investment specialists and is not intended to be a forecast of future events and or guarantee of any future result. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time.
Nuveen, LLC provides investment advisory services through its investment specialists.