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
JPMorgan Global Core Real Assets (JARA) offers investors exposure to core infrastructure, property and transportation around the globe with a bias away from the UK. JARA is managed by the Alternative Solutions Group (ASG) at JPMorgan, who allocate to institutional strategies run by JPMorgan’s Global Alternatives Group. JARA invests as a limited partner in perpetual life open-ended funds run for institutional investors which invest in private assets, offering exposure to funds otherwise restricted to pension funds and their ilk to the LSE investor. These allocations are expected to make up 80% of the portfolio, with the remainder invested in listed securities via segregated accounts. This allocation is across REITs, equity and debt, as well as listed infrastructure and transportation.
JARA was launched in September 2019 with assets of £149m, which have been supplemented by regular share issuance since then. Deployment had initially been a little slower than intended: with the disruption of the pandemic causing uncertainty in the underlying markets, and making sourcing and due diligence more difficult by restricting travel to visit assets. However the manager has managed to meet its target of seeing 100% of IPO proceeds drawn down within the first 12 months. On 24 September 2020 JARA announced it had made allocations to the global core infrastructure and global transport income strategies, with the capital to be drawn down by the underlying strategies by 1 October.
When we met with Philip Waller, a member of JARA’s Investment Committee, he said the team was confident of investing most of the additional £57m in capital raised since launch by the end of the year too. Although the flow of potential investments were delayed during the acute phase of the pandemic, we understand that there are now more opportunities lining up in the underlying markets. As a result, we would expect the board to issue further equity in order to be in a position to take advantage in due course.
In February and March this year the management teams went through the underwriting process again on all their pipeline investments, to ensure they were still as attractive and secure in the post-pandemic environment. A number of investments were dropped or delayed as a result. However there is now much greater visibility on the new deals likely to be on offer in the coming months. This development has seen the infrastructure and transport allocation drawn down, as the market has started moving again. These assets are the two highest yielding allocations, with expected yields of 8% net, so will help the manager meet their 4-6% dividend target next year. The Asian real estate investments are likely to be delayed further, with investment expected to happen in Q4 this year, but this is the lowest yielding part of the portfolio. Philip tells us the pipelines are quite robust, with a number of identified assets which could fulfil the allocation, but negotiating and finalizing transactions remains elongated and so it is taking longer for the final investment to be completed.
The strategic asset allocation is displayed below. The intention is to run with a portfolio balanced between real estate, infrastructure and transportation assets, supplemented by REITs and other listed opportunities to provide liquidity and diversification. By concentrating on core strategies the intention is to build a high-quality, income focused portfolio, which should be more resilient in market downturns and generate steady returns through the cycle. The intention is that the allocations will be shifted on a strategic basis, rather than a shorter-term tactical basis. The aim is to benefit from the alpha generated by the underlying portfolios, each of which has a high-quality bias, rather than through tactical asset allocation, which is often difficult to execute in illiquid assets. Nonetheless the relative value approach should lead to some counter-cyclicality, and the managers have taken account of the volatility in asset prices in the current crisis as they have invested the IPO proceeds. Only the Asia Pacific property allocation has yet to be made.
target strategic asset allocation
The listed real asset allocation was the first to be completed: unsurprisingly, given their daily liquidity. Philip and the team have also completed much of the intended allocation to US private real estate. The US commercial property market, like the UK’s, has seen plenty of volatility and uncertainty in the aftermath of the pandemic. However, to date, much of this anxiety has been focused in retail and non-core sectors. In keeping with the core, high-quality strategy of the underlying manager the exposure to non-core sectors and development assets is limited, whilst the retail exposure has been reducing. This cautious approach has insulated the strategy from much of the volatility seen more broadly.
Investment decisions have been made by trying to look through the immediate impact of the pandemic, and instead towards the long-term prospects. In industrials there is a focus on logistics, particularly last-mile sites serving online retailing. Another sector where the manager has been finding greater opportunities has been in residential developments, particularly single occupier units which they can buy in large developments due to their size. This sub-sector provides exposure to a part of the private markets that is more difficult to access, and has some tailwinds from an ageing millennial generation who might be looking to move out of city centers as their family grows and their work requirements change. The mandate does have retail exposure, but these are generally in major developments which should be more resilient – even as overall footfall in the sector falls. In terms of geographical focus the manager has had a focus on high-growth, often tech orientated, markets (e.g. Boston and San Francisco), with a lower relative exposure to markets like New York. Rental income received so far has been roughly 90% of pre-COVID levels, which is indicative of the quality in the portfolio, although the retail sub-sector has been weaker.
One substantial opportunity the ASG team see outside of their current allocation is in real estate debt. The managers are finding good opportunities in mezzanine financing, with spreads 100-150bps greater than pre-COVID levels. The position higher up the capital structure adds diversification to the current equity focused real estate allocation, and hence the manager is currently considering an allocation. The manager expects that this allocation would not increase the JARA’s exposure to real estate, simply diversifying further within the current guidelines. In keeping with their cautious approach the team have not yet filled their targeted allocation to Asia Pacific real estate, preferring to let the dust settle.
Importantly, given it makes up the largest single allocation of the target portfolio, the ASG do not think that commercial real estate is facing a doomsday scenario. Rather they think a lot of trends have been accelerated, such as in the retail and residential sectors. But other effects will be shorter-lived, such as with the office sector. Philip notes that the UK and European work cultures have tended to be more open to flexible working than in Asia and the US, where JARA invests, meaning the change in working habits may be less of an issue there. Furthermore, even in a flexible working environment, a business has to be ready for most employees to come in on some days: flexible workers tend to prefer Tuesday to Thursday in the office, for example. So the reduction in office space needed won’t be as dramatic as some might fear. In fact, office property makes up the expected second largest weighting in the top ten once the IPO proceeds have been invested, just behind maritime assets, and commercial property as a whole is expected to make up around 40% of the portfolio. The team do expect their exposure to retail assets to continue to fall, however.
expected top ten weightings
|Other Real Estate||5.38|
|Liquid Bulk Storage||3.78|
Some progress has also been made in acquiring transportation assets. Here the aim is to build a portfolio of backbone assets generating a high income from 5 to 15 year leases, with high-quality counterparties – mainly shipping as energy logistics and some aviation assets. As discussed in the ESG section, a lot of attention is paid to future proofing the fleets so that they have longevity, which means accounting for environmental challenges and regulations in these industries and acquiring cleaner and more efficient assets where possible.
The infrastructure exposure will focus on OECD countries and less GDP sensitive assets, which should be less impacted by any post-pandemic slump. The team favour long-term regulated and contracted revenues, such as can be achieved from regulated utilities and in renewables. Importantly, in these highly regulated assets, diversification across a number of regulatory regimes is key to avoiding overdependence on the decision of any one body. Interestingly the US, which regulates on a much more local level as opposed to a federal level, is an example of where this diversification can be achieved. Where the manager does have GDP-exposed assets these tend to be in lower beta segments, for example liquid bulk storage and airports and seaports. These have seen some capital write-downs in the crisis. Beyond their sector and diversification focus the managers view that the most promising transactions are in the middle-market, where 90% of transactions by number are but a minority of the deal value is. Historically this part of the market has been insulated from the more intense competition for ‘trophy’ assets, which has increased as more capital has been raised in the sector.
No gearing is applied at the trust level. In the core real asset LP strategies, to which the trust allocates, there is gearing however. At the time of launch the look-through gearing on the indicative portfolio was roughly 30% on an NAV basis. As the portfolio is not fully invested all gearing is offset by cash at the portfolio level, and the current look-through levels are not indicative of the end allocation. The core real estate bucket is the less-levered allocation, with an estimated average level of 25% to 35%. On core infrastructure assets JPMAM estimates 35% to 65% over the long run and 40% to 60% on core transportation assets. Current gearing on a look-through basis remains at the lower end of historical averages, with the underlying managers being conservative in the two years running up to the pandemic, given their views on cycle length and risks bulling in the market generally.
JARA has not been fully invested in the period since launch, so returns so far are not terribly informative as to the returns potential of the target allocation. Listed real assets, the first allocation to be filled, suffered in the immediate aftermath of the crisis although this has since rebounded somewhat. US private real estate slumped later in the year but given a positive Q1 the NAV in the allocation was flat over 2020 to the end of June. The largest overall impact on NAV total returns has come from the depreciation of the dollar versus sterling since late June. This has caused the NAV total return into negative territory, as the below chart shows. According to Morningstar, the NAV total return since launch is now -6.7%.
performance since launch
The dollar allocation is 90%, as of the end of August, but will come down to approximately 60% once fully invested. Currency is unhedged, so cable will continue to influence returns. But, in keeping with the long-term approach to investment, the managers believe that the costs of hedging outweigh the potential benefits, and from launch it has been planned for it to remain unhedged.
Over the long term the portfolio is expected to display equity-like total returns, from much lower volatility and with low correlation to equities and bonds. Backtested, over the past 11 years the core areas of allocation have displayed extremely low correlations to these conventional assets, although of course correlations can change.
cross-correlations of real asset sectors
||US Core RE
||European Core RE
||APAC Core RE
||Liquid Real Assets
|US Core RE
|European Core RE
|APAC Core RE
|Liquid Real Assets
JARA targets a dividend of 4% to 6% on the initial share price (net of fees) to be paid from a 7% to 9% NAV total return. The target for the first year, before being fully invested, was 2% to 3% of the issue price, which has been met with 2.25pps having been paid in the first three dividends. Dividends are paid quarterly, and three of 0.75p have been paid so far, when annualised equivalent to a dividend yield of 2.5% on the current share price. So far these have been paid from a mixture of cash via the share premium account and income.
The team are targeting a net yield of 3% to 5% from the real estate investments, 5% to 7% from infrastructure and 8% to 10% from transportation. One of the benefits of a diversified portfolio such as this is that the yield cycles should not move in step, meaning that there is scope to shift allocations into higher yielding sectors, when the outlook warrants it, to maintain the yield.
The average current yield on the AIC Infrastructure sector is 4.7% and 5.3% on the AIC Renewable Energy Infrastructure sector. Consequently JARA is aiming to offer an equivalent yield from what would be a much more diverse portfolio. The UK Commercial Property sector offers an average 4.9% yield. However there is still uncertainty around the outlook for rent collection while the pandemic lasts, which means we worry dividends could yet be cut further.
JARA is managed by JPMAM's Alternative Solutions Group (ASG). ASG are largely based in New York and advise on and build multi-alternatives portfolios for around 55 institutional clients based on proprietary research, data and analytics. They allocate to the products managed by the J.P. Morgan Global Alternatives Group, which amount to $145bn of assets. ASG is headed by Jamie Kramer, supported by Pulkit Sharma and Jason DeSena. This team provides insight and analytics to the ASG Investment Committee (IC) who approve and implement the allocation. The IC maintains ultimate responsibility for asset allocation and overall performance. Their top-down asset allocation work across real assets is combined with the bottom-up analysis and expertise of a number of specialist teams across JPMAM, who manage the underlying allocations. All manage many billions of dollars on behalf of clients, and are well staffed. The smallest platform is the Real Estate APAC team, which manages $1.6bn, having been set up in 2016. As many as 35 professionals are working on this desk already.
One of the key selling points of this trust is that it brings a universe of investment usually restricted to institutions to smaller wholesale and retail investors. Here the trust benefits from the scale of J.P. Morgan Asset Management in this space. Investors in a relatively small trust will be able to allocate to less liquid, geographically diversified and more specialised sectors, thanks to the scale of the underlying strategies.
The scale of resources ASG can bring to asset allocation decisions is correspondingly large. ASG has access to a huge range of performance time series – over 200 – for alternative assets which are often expensive or difficult to access, along with the modelling and analytical tools that they have developed over a decade of practice.
The team foresee adding extra asset classes to the mix in the future, should they become available and fit with the objectives of the trust. JPMAM, as such a large player in this space, expects to have early access to new opportunities as they come up, and have the resources to build out offerings in attractive sectors as they develop. Indeed the Asia Pacific property allocation foreseen at launch is one such recent example. The broader J.P. Morgan Global Alternatives team have been building out their exposure here since 2016, in the light of the good fundamentals they see supporting the asset class in the coming decades.
JARA has traded on a significant premium ever since launch, with the exception of a short period during the crash in February and March of this year when many investors likely fled to cash and sold indiscriminately (certainly discounts widened across the board in the investment trust sector). The premium is at 16.5% at the time of writing, perhaps reflecting the diversified asset base and perceived security of future income.
JARA issued shares regularly between its launch in October 2019 and June 2020. The Manager and Board have been avoiding issuing over the last couple of months, however, with the last issuance taking place back in June to, what we are led to believe were, index buyers. This move was to ensure that JARA remained on target for its deployment and didn’t dilute existing shareholders.
This programme was paused when the team felt that they were less sure of the visible pipeline and the timeline within which it could be invested, with the exception of a tranche issued surrounding JARA’s inclusion in the FTSE All Share. But we understand that the intention is still to grow the trust to the £500m envisaged at launch and beyond. Once the current proceeds are close to being fully invested or are committed we expect to see further equity issuance. All shares have been issued at a premium, the average of which is 9%, so those taking part have foregone a year’s worth of return, using the upper end of the target range. We think this indicates the investors are likely to be taking a long-term view on the investment which should reduce the volatility of the rating over time.
Although it has not been needed so far, the board has the authority to buyback up to 14.99% of the company’s shares when they are trading on a discount. There is also a continuation vote provision which will see one held every five years, starting at the fifth AGM.
Investors in JARA pay the management fees of the underlying strategies and segregated mandates plus an extra 5bps in asset allocation fees and the other costs incorporate with an ongoing charges figure (OCF). Based on the target initial asset allocation, and according to JPMorgan’s estimates, at £200m the total management fee should be 98bps, at £300m 97bps, at £500m 91bps and at £1bn 87bps (current net assets are £190m). The latest OCF is 1.32%, which compares to the average OCF’s ex performance fee of the listed property sector average of 1.51%, the listed infrastructure sector of 1.11% and the renewables infrastructure average of 1.12%. We understand the board still intend to grow the trust through share issuance once it has invested the current funds raised, and so costs should continue to fall as it does so. There are performance fees on two of the underlying strategies which have not yet been earned and included in the ongoing charges. On the infrastructure fund, the fee is 15% of the returns over a 7% hurdle over a rolling three-year basis, capped at a 13.5% return. On the transport fund, the fee is the same but with no cap. The latest KID RIY is 2.28%.
In our view it is notable that the fees are only marginally above the average of the best sector comparators even though JARA is not fully up to scale and invests in a much broader set of assets than the peer groups.
Each of the underlying strategies invested in by JARA explicitly and systematically includes ESG factors throughout the investment process, wherever they are relevant and material. The managers note that as investor political attention has focused more on these factors, and consequently they have become increasingly important to investment returns and considering how these issues are likely to develop is correspondingly vital for managers of these assets. In 2020 the pandemic has focused attention on the ‘S’. The managers of the underlying strategies have committed to considering the impact of their management decisions and aim to take a responsible approach.
With regards to their approach to the ‘E’, the managers highlight the trends in transportation where they believe newer, more energy efficient vehicles will have sustained advantages. For example, within the maritime sector they note that restrictions on the amount of sulphur in ships’ fuel have been increasing. Furthermore ships are now required to install filtration systems to clean water they take on for ballast in one port, before it is dumped in another port. Both requirements mean that owning a newer fleet has considerable financial advantages.
JARA also allocates to renewable/clean energy assets, which are expected to make up around 6% of the fully invested portfolio. While JARA does not fully avoid contentious investments, such as airline ownership, their embrace of sustainability within their investment process and portfolio could make this trust attractive to investors, who are looking for a real asset trust with demonstrable results of an ESG compliant process. As well as those who want to invest in strategies managing the transition to lower carbon energy, rather than to avoid fossil fuels outright.