Real assets tend to have predictable and steady cash-flow streams supported by regulated or contractual revenues and attractive operating margins
The contractual nature of the revenue streams and the requirement to pay out 90% of pretax income to unitholders means REITs have historically generated consistent income for investors.
Many infrastructure assets operate as government-regulated monopolies and, as a result, enjoy high barriers to entry. These monopolies last for decades and produce consistent cash flow and dividends that are positively levered to economic growth.
Source: 25-year period is represented by 1988Q4-2013Q3. Income and Capital Appreciation from Real Estate Investing: The Participation Trophy and the Performance Record, NAREIT Market Commentary, 29 August 2017.
The contractual nature of the revenue streams and the requirement to pay out 90% of pretax income to unitholders means REITs have historically generated consistent income for investors.
Source: 25-year period is represented by 1988Q4-2013Q3. Income and Capital Appreciation from Real Estate Investing: The Participation Trophy and the Performance Record, NAREIT Market Commentary, 29 August 2017.
Many infrastructure assets operate as government-regulated monopolies and, as a result, enjoy high barriers to entry. These monopolies last for decades and produce consistent cash flow and dividends that are positively levered to economic growth.
Retail investors’ allocations to real assets have historically lagged that of large institutions and pension plans, despite the historically low correlations and resulting diversification benefits.
Historically, real estate securities have shown relatively low correlations to stocks and bondsꝉ. This means that adding real estate securities to a portfolio should enhance diversification and result in the portfolio generating higher returns for the same amount of risk.
Historically, the performance of infrastructure securities has exhibited low correlation with other asset classesꝉ. This means that adding infrastructure securities to a portfolio should enhance diversification and result in the portfolio generating higher returns for the same amount of risk.
Source: Infrastructure Investing: A Distinct Asset Class, InstarAGF, October 8, 2015
Source: Infrastructure Investing: A Distinct Asset Class, InstarAGF, October 8, 2015
ꝉ Correlation measures the extent to which two items move in the same direction. A correlation value of 1 means two items move closely in the same direction, while 0 means they do not move closely at all in either direction, and -1 means the items move in opposite directions.
Historically, real estate securities have shown relatively low correlations to stocks and bonds*. This means that adding real estate securities to a portfolio should enhance diversification and result in the portfolio generating higher returns for the same amount of risk.
Source: Infrastructure Investing: A Distinct Asset Class, InstarAGF, October 8, 2015
Historically, the performance of infrastructure securities has exhibited low correlation with other asset classes*. This means that adding infrastructure securities to a portfolio should enhance diversification and result in the portfolio generating higher returns for the same amount of risk.
Source: Infrastructure Investing: A Distinct Asset Class, InstarAGF, October 8, 2015
*Correlation measures the extent to which two items move in the same direction. A correlation value of 1 means two items move closely in the same direction, while 0 means they do not move closely at all in either direction, and -1 means the items move in opposite directions.
History shows that real assets have outperformed stocks and bonds in periods of unexpected inflation. We believe this is because the cash flows of the underlying assets are positively-correlated to inflation.
Many REITs have annual rent increases that are tied to inflation and/or revenues that are sensitive to economic activity. As a result, rising inflation leads to cash flow growth and asset appreciation in these REITs*.
Revenues for many infrastructure assets are tied directly to inflation, providing a natural hedge and real long term returns. For other infrastructure assets, such as water and electricity utilities, the necessity of their services generates strong revenue and cash flow growth over the long term as consumers absorb price increases*.
Source: Bloomberg, as at December 31, 2019.
As at December 31, 2017. Source: Bloomberg and Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future and there is no way to predict precisely when such a trendwill begin. Stocks represented by the S&P 500 Index. Bonds represented by the BofA Merrill Lynch U.S. 7- 10 Year Treasury Index. Infrastructure represented by a 50/50 Blend of the Datastream World Piplelines and Datastream World Gas, Water & Multi-Utilities through July 2008 and the Dow Jones Brookfield Global Infrastructure Index thereafter. Inflation sensitivity based on a linear regression analysis of 1-year real returns and the difference between the realized inflation rate (y/y change in the Consumer Price Index) and the lagged 1-year- ahead median inflation estimate from the University of Michigan survey of consumers.
Many REITs have annual rent increases that are tied to inflation and/or revenues that are sensitive to economic activity. As a result, rising inflation leads to cash flow growth and asset appreciation in these REITs*.
Source: Bloomberg, as at December 31, 2019
Revenues for many infrastructure assets are tied directly to inflation, providing a natural hedge and real long term returns. For other infrastructure assets, such as water and electricity utilities, the necessity of their services generates strong revenue and cash flow growth over the long term as consumers absorb price increases*.
As at December 31, 2017. Source: Bloomberg and Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future and there is no way to predict precisely when such a trendwill begin. Stocks represented by the S&P 500 Index. Bonds represented by the BofA Merrill Lynch U.S. 7- 10 Year Treasury Index. Infrastructure represented by a 50/50 Blend of the Datastream World Piplelines and Datastream World Gas, Water & Multi-Utilities through July 2008 and the Dow Jones Brookfield Global Infrastructure Index thereafter. Inflation sensitivity based on a linear regression analysis of 1-year real returns and the difference between the realized inflation rate (y/y change in the Consumer Price Index) and the lagged 1-year- ahead median inflation estimate from the University of Michigan survey of consumers.
Real assets securities possess unique risk-return profiles and we believe the addition of these securities to a portfolio should yield higher total returns for the risk incurred.
Over the long-term, REITs have outperformed other major asset classes*. REITs have generally provided strong total returns comprised of tax efficient regular and growing distributions, and long-term capital appreciation driven by Net Operating Income growth.
Over the last decade, global infrastructure securities have delivered higher total returns than global equities and global bonds. The strong operational leverage in most infrastructure firms’ business models, combined with high barriers to entry produce sustainable, long-term returns in the form of attractive dividend income and capital appreciation*.
Over the long-term REITs have outperformed other major asset classes*.
Over the last decade, global infrastructure securities have delivered higher total returns than global equities and global bonds. The strong operational leverage in most infrastructure firm business models, combined with high barriers to entry produce sustainable, long term returns in the form of attractive dividend income and capital appreciation*.
Starlight Capital is an independent Canadian asset management firm. We are investment led and client-focused and we believe investing is about finding great businesses that will do well over long periods of time. When we find these businesses, we conduct our own independent analysis and take meaningful positions when the risk/reward outlook is favourable. Our uniqueness is demonstrated through:
The Case for Global Real Estate
* Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing.
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