JPMorgan Global Core Real Assets 14 October 2020
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Global Core Real Assets . The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan Global Core Real Assets (JARA) aims to generate a 4-6% dividend yield and a 7-9% NAV total return from investing in global property, infrastructure and transportation assets, supplemented with a liquid real asset allocation. Following its launch in September 2019, JARA recently announced that it has invested all its IPO proceeds on time despite the market disruption caused by COVID-19.
The portfolio is expected to generate a yield in the middle of the expected range and in line with expectations at launch. This yield will be generated from core real assets selected to provide high-quality, forecastable and resilient cashflows providing stable, often inflation-sensitive, income and global diversification from the UK focus of most other infrastructure or property trusts.
JARA launched a few months before the pandemic hit, which has caused uncertainty in the underlying asset classes. Although this situation has delayed some investments, it has overall offered the managers to opportunity to acquire assets at more advantageous prices and/or yields.
Demand for shares has been strong since IPO, and £57m has been raised on top of the initial £149m. This money is expected to be fully invested in Q4. The intention remains to grow the trust to £500m and beyond, offering investors cost and liquidity advantages; with the shares trading on a 16.5% premium to NAV, there are no indications this goal will be difficult to achieve. The tiered fee schedule should reduce the fees as the trust grows, while the diversification of asset base and size of the JPM Alternatives platform means that scaling up should be relatively quick and cost-effective.
In our view owning real assets has only become more attractive since the pandemic emerged. They offer generally more resilient income streams than equities, greater return potential than bonds and substantial diversification benefits. Furthermore, there is an element of inflation sensitivity to the income, which could be an attractive feature right now. One possible outcome from this crisis is governments inflating away the debt incurred to fight it, while there remains the tail risk that monetary expansion – particularly under any MMT policy – could finally go too far and ignite inflation. Even if inflation does not materialise, the income streams of JARA’s real asset base should offer a significant uplift compared to both government and investment grade bonds.
We also note JARA complements the heavy UK and Europe focus of most infrastructure and property trusts. The USA and Asia should see better demographics and productivity growth in future, and real assets should be more correlated to these fundamental growth factors than equity markets. The diverse, global portfolio is only possible thanks to the breadth and depth of the JPMorgan Global Alternatives platform: we think the opportunity to access markets usually open only to institutions is attractive, and perhaps explains the high premium. However this premium will reduce the dividend yield generated to underlying shareholders. Nevertheless the longer the investor’s time horizon, the less important an initial premium should be to experienced total returns – assuming the share price converges to NAV.
|Real assets traditionally offer very little correlation to equities or bonds
|A high premium would reduce the dividend yield experienced by shareholders if sustained
|JARA offers access to a huge global platform of alternatives, much of which is usually restricted to institutions
|Sterling has been weak since 2016, were it to rally then JARA’s returns would be reduced
|The yield is potentially attractive once fully invested, and targeted total returns are equity-like
|Commercial property – 50% of the target portfolio – and transport assets could see further uncertainty while the pandemic continues