Investing in real assets involves shrewd choices as well as good timing
From time to time investors should all watch the launch of a SpaceX rocket and wait for its booster rockets to land safely back on Earth.
This is an almost miraculous combination of cutting-edge technology and the law of gravity. Seemingly the impossible has become possible. You are also looking at the bigger picture: planet Earth, big money and economic returns.
For learning how to fly into space on a budget is likely to result in the creation of a multitrillion-dollar space sector in the US stock markets. Virgin Galactic – Richard Branson’s space craft tourism venture backed by Abu Dhabi’s Mubadala – became the first listed stock in this space last month. When Mr Branson launched his venture in Dubai more than a decade ago he asked the assembled journalists: “Who wouldn’t want to go into space?” Only my hand went up.
However, back on Earth investors are facing a more immediate problem. The majority have their wealth tied up in financial assets – that is to say stocks. bonds and cash.
While in the short run cash is king in a recession, in the longer term it always loses to inflation, devaluation or both, because central banks gradually devalue money to wipe national debts. US 10-year Treasury bonds yield just 1.95 per cent and bonds have a similar devaluation risk to cash. Share dividends are benchmarked against this low yielding 10-year Treasury bond. The S&P 500 index of top US stocks has a paltry average dividend of 1.8 per cent.
Meanwhile, the cyclically adjusted price-to-earnings ratio as created by Nobel Prize-winning economist Rober Shiller indicates that US stocks are at their most overvalued in history, apart from before the dot-com crash in 2000 and Great Crash of 1929. Then consider that if the stock market were to fall heavily in value the US Federal
Reserve would slash interest rates, and that would bring bond prices crashing down.
Perhaps then it is no wonder that global asset allocation has shifted away from financial assets and into real assets. Exposure has increased from 5 to 20 per cent since 2000.
Real assets are diverse income-producing fixed assets. By far the most important is real estate – residential, offices, industrial, hotels and retail. Other sub-categories include: energy pipelines, forestry agricultural land, airports, railways, highways, windmills, solar farms, shipping and mines – and space travel.
Such real assets are significantly undervalued in comparison to financial assets, and offer a higher income stream. Real assets are already a $50 trillion to $60tn market and analysts say that could double in 10 years.
The most difficult thing is to decide what, when and where to buy. This is a diverse array of investment opportunities, and not everything that glitters will turn out to be gold. In addition, it will almost certainly be better to buy these assets after a stock market correction rather than before it. A falling tide will sink all boats. So how can the average punter invest?
The creation of more than 200 Real Estate Investment Trusts has made it easy to be a passive investor. Three real estate exchange traded funds tipped by Forbes recently are: National Health Investors, Crown Castle International and Duke Realty.
For windmills there are speciality funds such as Brookfield Renewable Partners and Hannon Armstrong. You can buy into energy pipelines with listed vehicles such as Energy Transfer and Magellan Midstream Partners or buy shares in quoted airports and highway operators.
Timber and Farmland Reits such as Farmland Partners and W eye rh ae user offer exposure in this sector; and the VanEck Vectors Gold Miners ETF is a popular risk diversifier.