Deciding how to allocate your assets can become rather complex, which is why many people hire a financial advisor.
I’m not a big financial advisor fan. In fact, I think I’ve made that clear in many of my blog posts, and in my book.
As a result, I’m left deciding how to allocate my assets. Truth be told, it’s something I rather enjoy doing, plus, I enjoy the research.
So what asset class am I most interested in at the moment? Real Assets.
What are Real Assets?
Some of my main considerations when looking at various stocks, or asset classes, is how correlated the asset class (or stock) is to the rest of the market, how risky the asset class is, and what the long-term return expectations are.
A few weeks ago, for example, I wrote a blog post about an investment in a 32-unit apartment building with an expected 27% pretax IRR over a 3-year time period. I did a deep dive into the numbers and how to generate significant returns from an MUR in a low CAP environment. If you’re interested, the article is titled A 32-Unit Apartment Building Is for Sale. Here’s How to Make 110% Return Inside Three Years.
Buying another apartment building definitely fits into my asset allocation and ticks many of my personal boxes that I use to gauge my investment decision-making. In the blog post titled How I Protect and Grow My Wealth With These 8 Simple to Understand Concepts, I discussed a number of points, and of the eight I discuss in the blog, I will highlight a few that are relevant to what I am about to discuss.
- I want diversified assets across multiple sectors, asset classes, and currencies
- My portfolio should produce a steady stream of dividend income
- I need my assets to move in-line with inflation
- I have a long-term time horizon
- Ideally, and where possible, my portfolio should have some uncorrelated assets
Buying real estate fits that profile. I mentioned in the article that I am able to retrofit the building, increase rents, and in a short period of time realize a significant return on my initial investment.
Buying, renovating, and then flipping an apartment building isn’t something many people have the appetite for or capital to do, but the investment model still makes sense. And even then, and in my case, I want to diversify my capital across multiple sectors and geographies and not have too many of my financial assets in one basket.
As an alternative, and where it makes sense, it is possible to invest in other real assets without necessarily having to take possession of these assets yourself. It is these types of real assets that should form a part of every person’s portfolio. What I am about to discuss also forms a good portion of my own portfolio.
Before I dive too deep into the rationale for investing in real assets, I will first describe what a real asset is, then provide you with some reasons that it makes sense to allocate some cash to real assets. Finally, I will finish this blog with an example of some of my publicly traded real asset investments.
What Are Real Assets and Why Invest in Them?
Real assets are physical assets that a business or investor owns that are value-generating. For example:
- Real estate (commercial, industrial, apartment buildings, public storage)
- Energy pipelines
- Windmills and solar farms
A real asset is valued similarly to how a regular stock might be valued. For example, if you were to look at the big five Canadian bank stocks, they all trade within a similar range of multiples of earnings. TD trades at a better multiple than CIBC, for example, primarily because TD’s growth prospects are somewhat better, so investors add a small premium to the TD stock over CIBC.
A real asset investment works in a similar manner.
In the blog post I referenced above about the 32-unit apartment building, I demonstrated how the building’s value can be increased by raising the rents. I discussed how, for every dollar in revenue the building receives, it correspondingly increases the value of the building by approximately $28.
Real assets, airports, for example, are valued in a similar manner. Their valuations are tied to cash flow and how much investors might be willing to pay for the future stream of earnings. However, one of the primary differences between a bank, like TD or Bank of America, and a public airport is that the airport has intrinsic value in and of itself.
Investing in a real asset, like an airport, building, or energy pipeline, typically has the following benefits:
- They can earn good cash on cash yield
- Are contracted for a long duration
- Have a stream of cash flows that are tied to inflation
- Have lower volatility because they are privately owned
- Have traditionally had excellent returns in excess of other options
It isn’t just me suggesting to my readers that it might make sense for you to invest in real assets. The rest of the world is also waking up. Take a look at this chart from Brookfield that highlights the amount of capital allocated towards real assets from 2008 and then expected into 2025.
And this chart also demonstrates that allocation toward real assets comprised 5% of the typical investor’s portfolio in 2000, 25% in 2017, and it’s expected to grow to 40% by 2030.
One of my favorite stocks is Brookfield Asset Management (BAM). Brookfield is a complex company with many subsidiaries that invests across a broad cross-section of real assets with over $300 billion under management and a global presence in over 30 countries. Their returns since 1997 have been outstanding.
BAM invests in infrastructure, real estate, natural resources, and other alternative investments that generate high income, appreciate in value, and have produced a steady stream of reliable cash flow.
When comparing a real asset investment to a financial stock, for example, they are typically less volatile, allow you to diversify your risk, and generally have a well-protected moat with a steady stream of cash flow.
How Can You Invest in Real Assets?
Fortunately, you don’t need to have a billion dollars, or more, in your pocket, which is what it would take to buy the Sydney Airport (which is publicly traded, by the way). All you need is a computer, a few clicks, and some dollars to get started.
Here are a few examples of both companies and funds that you can invest in if you want to get started with investing in real assets:
Commercial Real Estate: This is the most common type of real asset that most people are already familiar with and have likely already invested in. Other than owning your own home, you can invest in a REIT. Some popular examples include the iShares S&P TSX REIT (XRE) or the iShares US Real Estate REIT (IYR). In addition to these two, which I happen to own, I also own other Canadian and US REITs: Simon Property Group, Iron Mountain, Welltower, and Omega(all US) and Northwest Healthcare, Canadian Apartment Trust, and Choice Properties REIT(all Canadian).
Energy & Energy Pipelines: It’s possible to purchase stocks in companies like Fortis (FTS) or Enbridge (ENB).You can also purchase a high yielding MLP like Cohen & Steers MLP Income Fund (MIE) or Magellan Midstream Partners (MLP).
Airports: There are many publicly traded airports all over the world that you can invest in, simply by buying the shares. Examples include the Sydney Airport (OTC: SYDDF) or the Auckland International Airport (OTCPK: AUKNY).
Companies That Invest in Real Assets: I mentioned Brookfield Asset Management (BAM) or some of the other Brookfield divisions like Brookfield Infrastructure (BIP), Brookfield Property Partners (BPY), or Brookfield Renewable Partners (BEP). You can also invest in Blackstone Group (BX) or The Carlyle Group (CG), both of which do the same thing as Brookfield. I am long in all these positions BTW.
Real Assets Are A Multi-Trillion Dollar Opportunity
The following quote was taken directly from Brookfield’s Q4 letter to shareholders.
“We are in the early stages of the bulk of the infrastructure backbone of the global economy being transferred into private hands from the public sector. We believe that this will translate into an opportunity of many tens of trillions of dollars over the next 50 years for the private sector.
There are a number of reasons for this shift from the public to the private sector, but we think there are three main reasons. The first is that governments are highly indebted; despite this, they still need to keep up with both investment of capital into new infrastructure in the developing world, as well as the maintenance of old infrastructure in the developed world. The second is that private enterprise has proven to be far more efficient at building new infrastructure, as well as operating that infrastructure, than the public sector. The third is that interest rates are very low(ish) by historical standards and are expected to be that way for the foreseeable future. As a result, institutions need something to replace fixed-income allocations in their portfolios that has low risk but reasonable returns. Infrastructure is part of the solution.
As a result, we expect that over the next 50 years there will be both a very large supply of capital for projects and very large demand by governments for infrastructure capital.”
The three companies I mentioned above, Brookfield, Blackstone, and The Carlyle Group are all very large companies that focus on infrastructure.
Real assets now comprise a portion of my overall portfolio for all of the reasons I have outlined above. Not only do most of the securities I mention pay healthy dividends, but they all have fairly high IRRs that also provide for capital appreciation as well and, in many cases, trade below their NAV (net asset value). I expect that as long as interest rates remain low, which they should for the foreseeable future, real assets should prove to be an excellent place to invest your capital.
If you liked this post, you might also like this one: Here’s How To Buy An Apartment Building And Make A Whopping 110% In Three Years.
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Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.