Real assets form the backbone of the global economy and represent the physical assets that facilitate economic activity. At Starlight Capital, our expertise in real assets is focused on global real estate and global infrastructure assets and securities. Historically these investments have provided investors with consistent cash flows, inflation protection and long-term capital appreciation.
Traditional commercial and residential real estate subsectors include retail, office, industrial, multi-family, storage, lodging, diversified and healthcare. In addition, the specialty category has expanded in recent years to include mortgage, data centers, telecom towers, advertising and timber.
Infrastructure has traditionally included transportation, power, utility and energy sectors and assets. To that we add other monopoly or essential service providers such as data storage, telecommunications, payments networks and digital search to capture the entire spectrum of infrastructure.
Real assets like real estate and infrastructure can provide investors with unique risk-return attributes that are differentiated from traditional stocks and bonds. Our view at Starlight Capital is that adding real estate and infrastructure investments to a diversified portfolio should result in the portfolio generating higher returns for a given level of risk and/or volatility.
Real estate and infrastructure assets tend to have predictable and consistent cash flow streams supported by regulated or contractual revenues and attractive operating margins. In addition, real estate and infrastructure assets are generally driven by long term fundamental drivers such as population growth, urbanization and digitization that drive utilization and occupancy levels higher and support long term capital appreciation.
The benefits of investing in real assets have long been recognized by large institutional investors such as Canadian pension plans. The 100 largest pension plan funds in Canada have allocated approximately 17 per cent of their assets under management or $396 billion to real estate and infrastructure assets1. The attractiveness of reliable long-term returns, inflation protection and low correlations to traditional stock and equity investments have resulted in rising allocations to real assets from these large investors2.
These increased allocations to real estate and infrastructure come at a time when governments around the world are faced with the need to reinvest in aging infrastructure. The required funding is increasingly being met with public-private partnerships and/or the outright divestiture of government-owned infrastructure and real estate assets. Global corporations have also begun to monetize their real estate and infrastructure assets into a receptive market in order to reinvest capital back into their core businesses and operations.
Real estate and infrastructure assets have historically performed well during rising interest rate environments because of the direct link to economic growth. As unemployment falls and economic activity rises, central banks often increase rates in an effort to curtail inflation. The increased economic activity generally results in higher utilization of infrastructure assets and higher occupancy in real estate assets. In addition, the tenants occupying the real estate are able to pay higher rents and the users of infrastructure assets are able to pay higher fees and tolls. The end result is higher revenues and cash flows from real assets that more than compensate for higher interest rates.
Many Canadian investors are under-weight real assets because of the lack of investment options available to them. According to the Investment Funds Industry of Canada (IFIC), Canadian investors have allocated $1.46 trillion to investment funds3. However, data from the Canadian Investment Funds Standards Committee (CIFSC) indicates that Canadians have allocated less than five per cent of that capital to real estate and infrastructure investment category funds. Compared to the 17 per cent allocated by large pension funds, it is clear that many Canadian investors are underweight real assets.
Starlight Capital’s goal is to deliver superior, risk-adjusted, long-term returns for investors through our proprietary investment strategy − Focused Business Investing. Specifically, Starlight Capital builds concentrated portfolios of high-quality businesses when they offer sufficient return for the risk incurred. We provide Canadian investors with access to global real estate and infrastructure assets and securities. In many cases this includes sectors that are not available in the Canadian investment landscape such as airports, toll roads, data centres and telecom towers. Canada makes up a small portion of the global real assets market and often the very best investment opportunities exist outside our borders. Starlight Capital gives investors access to these unique opportunities in a disciplined manner.
Dennis Mitchell | CEO & CIO, Starlight Capital
Sources: 1. Pension Investment Association of Canada, as of December 31, 2017, 2. Real Assets: Real Diversification. Brookfield Asset Management Inc., 3. Investment Funds Institute of Canada (IFIC), as of October 31, 2018
