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EXECUTIVE SUMMARY
The current market environment is leading investors across the globe to seek an alternative to traditional equity and xed income investments. Following a multi-year decline in interest rates and recent global nancial upheaval, the ability to invest for yield has diminished and the outlook for growth has been generally subdued. With interest rates beginning to rise and the potential for ination looming, investors are seeking a New Essential portfolio investment to help navigate the market cycles that lie ahead.
Brookeld believes this pursuit of a new alternative is creating a secular shift toward increased investment in Real Assets. Importantly, we believe that Real Assets offer a relatively unique combination of yield, stability and growth that can provide downside protection as well as upside value creation. Over the course of Brookelds experience as an owner and operator of these assets and based upon an analysis of their historical performance, Real Assets have demonstrated a proven ability to enhance overall risk-adjusted returns across market cycles. Looking ahead, as investors recognize the benets of Real Assets, we expect a meaningful shift in asset allocations to occur, which may rival the historic transformation of institutional investment from xed income to equity securities. We expect this trend to accelerate materially over the course of the next decade, with allocations to Real Assets reaching 20% to 30% of portfolios by 2030, with some institutional investors allocating upwards of 50% to the asset class. Based upon recent investment trends and fundraising activity, we believe this transformation is underway and expect that it will continue to grow as investors recognize and appreciate the attractive, long-term benets of Real Asset investment. Within the constraints of the current market environment and across future challenges, we believe Real Assets can generate compelling risk-adjusted returns, provide attractive capital appreciation and deliver important diversication benets. Accordingly, as investors move beyond the New Normal, we expect Real Assets to emerge as the New Essential. In this piece, we provide an assessment of recent investment trends as well as an overview of the attractive characteristics of Real Assets. Following this discussion, we offer a detailed introduction to the asset class.
Potential Benets of Investment in Real Assets Stability Income Upside Potential Visible Growth Drivers Attractive Performance Low Volatility Ination Protection Investment Diversication Portfolio Diversication Steady cash ow streams supported by regulated or contractual revenues and attractive operating margins Reliable current income with long-term capital appreciation potential Meaningful leverage to economic growth Positive growth momentum led by signicant fundamental trends Compelling absolute and relative returns Attractive risk-adjusted returns Cash ows tend to increase in an inationary environment Diversity of geography, currency and asset type Low correlation to traditional equity and xed income investments
Note: An investment in Real Assets involves signicant risks, including loss of the full amount invested.
INFLATION CONCERNS ON THE RISE The prospect of rising interest rates is leading to a corresponding increase in concern over ination. While current levels of ination remain modest and do not appear to represent a near-term threat, the potential for rising costs over the medium-term is expected to lead investors to seek alternatives that offer a greater degree of ination protection. LOW GROWTH ECONOMIC ENVIRONMENT Although the global economy has recovered from the recent nancial crisis and pockets of growth have begun to re-emerge, overall growth remains subdued, with few visible catalysts to ignite a meaningful change in trend. Despite this low growth environment, interest rates are on the rise. In such an environment, we believe that investors will likely need to look beyond traditional equity and xed income investments to generate attractive returns. Exhibit 3: Subdued Global Growth
TAPERING OF CENTRAL BANK SUPPORT ON THE HORIZON Given the historically low level of nominal yields as well as recent improvements in global economic growth, rates have begun to rise. Importantly, this move in rates has been exacerbated by central bank activity, as the U.S. Federal Reserve appears poised to begin tapering asset purchases in the near term, with a full end to quantitative easing possible in the next few years. While the Federal Reserves potential tapering of accommodative monetary policy does signal a return to more normalized growth in the U.S., the drawdown of this meaningful support will almost certainly lead to a further increase in Treasury rates and bond yields. As a point of reference, both instruments witnessed a signicant rise in rates following the mere announcement of the Federal Reserves intentions in just four months time, from the end of April until the beginning of September 2013, the 10-year U.S. Treasury rate increased by over 120 basis points or more than 70%, while the average yield on U.S. investment grade bonds increased by over 80 basis points, or more than 45%1.
INCREASING DEMAND FOR ASSETS OFFERING STABLE INCOME AND GROWTH POTENTIAL At the same time that yields have fallen and the outlook for growth has declined, demand for income-producing assets with upside potential has increased. Among both institutional and retail investors, liquidity needs are on the rise. For instance, the aging U.S. Baby Boomer population is nearing retirement and is seeking a stable source of income to weather the market cycles that lie ahead. Exhibit 4: Aging U.S. Population
Additionally, many institutional investment plans that service longterm liabilities are signicantly underfunded, due in large part to the inability of investment returns from traditional asset allocations to keep pace with rising liability requirements. In particular, public and private pension plans have witnessed ballooning decits and widening shortfalls as investment yields have fallen while liabilities have increased. Importantly, the number of retirees serviced by these plans continues to grow, due to the overall aging of many developed market populations as well as increasing life expectancies across the globe. This combination of accelerating demand for benets and decelerating growth in pension assets is leading to signicant nancial strain. Of note, recent studies of the funding status among U.S. state and municipal pension plans have estimated the current aggregate shortfall at over $2 trillion1. Interestingly, while the methodology underlying these studies assumed investment returns on pension assets would range from approximately 4.0% to 6.0%, U.S. states are assuming much higher rates of return, in the range of 7.25 to 8.25%.1 In view of the current low yield environment, such returns are not likely to be achieved through investment in traditional asset classes, which may require these pension plan sponsors to look elsewhere for more compelling returns.
A historical precedent for such a meaningful transformation can be found in the equally signicant shift from xed income to equities that has occurred over the last 30 years. As recently as the early 1980s, nearly 60% of assets held by U.S. institutional investors were allocated to xed income securities (Exhibit 5). However, challenging investment trends and macroeconomic factors, including double digit ination, led investors to seek a higher growth alternative. Accordingly, over the subsequent 20 years a dramatic shift in asset allocations occurred, whereby xed income investments fell to only 30% of portfolio value by the year 2000.
Center for Retirement Research at Boston College and Moodys Investors Services: Adjusted Pension Liability Medians for US States, June 2013
Investors appear to be recognizing these attractive characteristics, as demonstrated by recent trends in institutional allocations and fundraising activity. For instance, over the last 10 years, real estate allocations by public dened benet pension plans have increased from just over 3.0% of portfolio value to nearly 8.0% (Exhibit 5). More recently, fundraising activity has demonstrated a signicant acceleration in demand for Real Assets. During the rst half of 2013, 18% of the nearly $210 billion raised globally by private equity funds was targeted towards Real Asset investments (Exhibit 6). Exhibit 6: Recent Momentum in Real Asset Fundraising Activity
Source: Pensions and Investments; data represents average asset mix of top 1,000 U.S. public dened benet pension plans since 1991 and average asset mix of top 200 U.S. public dened benet pension plans from 1984-1991; data as of September 30 of each respective year. Alternatives includes private equity and hedge fund investments.
Today, investment trends and macroeconomic factors are converging once again to lead to another potential shift in asset allocations this time to Real Assets. At a time when investors are struggling to fund long-term liability requirements, protect current wealth, participate in a recovering economy and defend against the potential for rising ination, Real Assets can offer an attractive alternative. Through a unique combination of steady current income, leverage to an improving economy and protection against ination, Real Assets may provide the foundation for institutional investors to navigate current and future market environments.
Measuring Real Asset Performance
We believe these indicators demonstrate the potential for a long-term trend, as awareness of and appreciation for Real Assets continues to accelerate. Over the next decade, we expect Real Assets to be embraced by the global investment community as a compelling alternative to traditional xed income and equities and emerge as the New Essential.
Throughout the analysis included in this piece, the following indexes have been utilized to measure and represent the performance of Real Assets, unless otherwise noted. Please refer to the disclosures at the end of this report for a detailed description of each index. Property Infrastructure Timberlands NCREIF Property Index (data availability begins in 1Q 1978) Dow Jones Brookeld Global Infrastructure Composite Index (4Q 2002) NCREIF Timberland Index (1Q 1987) Agrilands Stocks Bonds NCREIF Farmland Index (1Q 1991) MSCI World Index (1Q 1978) Barclays Global Aggregate Bond Index (1Q 1990)
Of note, as private investment in infrastructure has only recently begun to accelerate, a private market infrastructure performance index with a meaningful track record does not currently exist. Accordingly, the Dow Jones Brookeld Global Infrastructure Composite Index was utilized as the chosen proxy for the asset class. Currently comprising more than 125 companies and with a market capitalization of over $1.0 trillion1, the Dow Jones Brookeld Global Infrastructure Composite Index includes publicly-listed infrastructure companies traded on developed market exchanges with historical data dating back to December31,2002. A key measure for inclusion in the index is that 70% of cash ows must be derived from the ownership or operation of infrastructure assets. This is a signicant differentiator from other indexes, which have a broader denition of infrastructure and are often dominated by infrastructure service companies, such as energy utilities, construction companies and mining companies. In contrast, the Dow Jones Brookeld Global Infrastructure Indexes focus on companies that are more likely to generate stable and predictable cash ow growth and are typically less cyclical in nature. Additionally, to be eligible for inclusion in the Dow Jones Brookeld Infrastructure Indexes, a company must have a minimum oat-adjusted market capitalization of $500 million as well as a minimum three-month average daily trading volume of $1 million. Securities also must be domiciled in a country with a liquid market listing. For more information on the Dow Jones Brookeld Global Infrastructure Indexes, please visit www.djindexes.com/infrastructure.
1
While investor risk preferences and return needs may vary and asset allocations may include a more diverse set of opportunities than those included above, the Efficient Frontier conrms our belief in the attractiveness of Real Assets and the potential for meaningful growth from current allocation levels.
The Growth Potential of Real Assets While we expect investor allocations to Real Assets to accelerate in coming years, the global investible asset base is expected to grow exponentially as well. Current estimates of total global assets managed by institutional investors stands at $71 trillion, of which $45 trillion is invested to meet long-term nancial obligations1. We expect this long-term invested asset base to increase in size to over $70 trillion within the 2020s, producing $25 trillion in new capital ows2. Should investor allocations progress as we expect over the same time horizon, 20% to 30% of these new capital ows may be targeted towards Real Assets, leading to nearly $10 trillion of capital seeking Real Asset investment opportunities over the next 15 years. Importantly, as demand for Real Assets continues to rise, the supply of Real Asset investment opportunities is expected to expand as well. Global population growth and increasing urbanization around the world are leading to rising demand for new development. When combined with the overdue refurbishment or modernization of existing assets in many mature markets, a signicant need for capital has become apparent. Recent estimates indicate that this need may total as much as $55 trillion through 2030 in the infrastructure asset class alone3. Over the same time period, an analysis of global property markets reveals that over $15 trillion will need to be spent in order to simply maintain existing ratios of property investment relative to Gross Domestic Product (GDP)4. Given the current strain on government balance sheets around the world, public nancing will not be able to subsidize this $70 trillion price tag alone, creating a signicant opportunity for the investment of private capital. Furthermore, the ability to invest in existing Real Assets is expected to increase as well. In recent years, privatization of state-owned assets including toll roads, airports and seaports has accelerated, as governments across the globe seek to increase liquidity. Additionally, diversied owners of Real Assets are increasingly selling their holdings in order to become more capital and cost efficient, such as mining companies divesting their captive railroad systems. We expect these trends to continue to expand in the coming years, leading to a growing opportunity to invest in existing Real Assets. This combination of population growth, strained public nances and increasing monetization of in-service assets provides many options for investment. Whether investors seek opportunities for new development or existing assets in mature markets or emerging growth economies, the Real Asset investible universe appears poised for meaningful growth.
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Source: U.S. Federal Reserve, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; the Real Asset category is comprised of performance results (over the duration of available data) generated by the previously dened indexes for Property, Infrastructure, Timberlands and Agrilands, weighted by the investible universe of each; the Stocks category is represented by the S&P 500 Total Return Index, the Bonds category consists of the Barclays U.S. Aggregate Bond Index and the Cash category is comprised of the 3-month U.S. Treasury bill.
As demonstrated above, the Efficient Frontier for the portfolio containing Real Assets is higher than that of the more traditional portfolio, indicating that returns are greater across the spectrum of risk. For example, assuming a standard deviation of 4.5%, the portfolio of traditional investment options generates a return of 7.5% while the portfolio including Real Assets produces a return of 9.5%. As such, the portfolio including Real Assets generated 200 basis points of incremental return for the same level of risk. While the value of this incremental return varies across the risk spectrum, it remains positive throughout, indicating that the addition of Real Assets to a mixedasset portfolio improved overall risk-adjusted returns throughout the time period of historical performance captured by this study. Additionally, the Efficient Frontier suggests that the optimal allocation to Real Assets can be found along the upward slope of the curve, highlighted in Exhibit 7. The target allocation to Real Assets reected in this portion of the curve ranges from 25% to 80%.
OECD; Climate Policy Initiative, March 2013 Brookeld Asset Management estimates 3 OECD: Strategic Transport Infrastructure Needs to 2030 4 EPRA, World Bank, PricewaterhouseCoopers, Brookeld Asset Management
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Source: Brookeld Investment Management research and estimates; projected Same Store NOI Growth is based on proprietary Brookeld Investment Management research and nancial analysis and is subject to change without notice; data as of June 30, 2013 based upon rst quarter 2013 earnings announcements.
ATTRACTIVE YIELDS WITH LONG-TERM CAPITAL APPRECIATION The relatively steady and predictable cash ows produced by Real Assets support attractive current income streams. As indicated in Exhibit 10, the average historical income return across Real Assets has meaningfully outpaced equities and compares favorably with bonds. Additionally, current Real Asset yields remain signicantly higher than both traditional asset classes. These attractive income streams may protect the value of an investment during recessionary environments and can also provide an important cushion against rising interest rates. Furthermore, the sustainable and predictable nature of these income streams leads Real Assets to offer a compelling option for investors with regular cash distribution requirements. Exhibit 10: Comparative Income Returns and Current Yield
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents average annual returns over the duration of data available for each index.
Source: Brookeld Investment Management research and estimates; FactSet; S&P Dow Jones Indexes; Merrill Lynch Global Quantitative Strategy; MSCI; IBES; Worldscope; data as of December 31, 2012 and reects median EBITDA growth in each respective time period. Brookeld.com | For Clients Only. Not for Redistribution. B
As demonstrated in Exhibit 10, investment in Real Assets also provides meaningful capital appreciation potential. These long-lived, hard assets tend to increase in value over time, as replacement costs rise and operational efficiencies are achieved, particularly for well-located assets with high barriers to entry.
EQUITY-LIKE UPSIDE Although a signicant portion of Real Asset revenue streams are subject to long-term, contractual agreements, the asset class also retains exposure to an improving economic environment. Whether it is realized in the form of improved leasing of vacant property space, growing throughput on toll roads, rising volumes of energy demand, expanded harvesting of timber assets, or climbing food prices, Real Assets reap the benets of a strong global economy. While Real Asset current income protects value on the downside, operational leverage enhances value on the upside. Exhibit 11: Average Annual Returns during Periods of Economic Recovery
Agrilands Ag grilands Global population growth and increasing consumption levels Growing demand for biofuels Slowing yield growth rates
COMPELLING ABSOLUTE AND RELATIVE RETURNS As evidenced in Exhibit 13, Real Assets have produced impressive absolute and relative returns over the last 10 years, outperforming both the global equity and global bond markets. Exhibit 13: Attractive Return Prole
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents average annual returns during periods of economic recovery, as dened by the National Bureau of Economic Research, over the duration of data available for each index.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013
GROWTH POTENTIAL In addition to meaningful leverage to an improving economic climate, fundamental trends in each underlying asset class are leading to attractive growth momentum. While several of these trends may require a longer time horizon to materialize, we believe they provide a clear and sustainable path upon which Real Assets can continue to produce compelling income and capital appreciation. Exhibit 12: Growth Drivers for Real Assets
Property Employment growth leading to increased leasing demand Low levels of new supply Infrastructure Global population growth Existing infrastructure in need of repair or refurbishment New infrastructure development in emerging markets from growing wealth and urbanization Acceleration of privatization activity leading to an expanded investible universe Declining availability of public capital to fund needed expenditures Timberlands Recovery of U.S. housing market Asias increasing wood demand Reduced supply from Canada and Russia Supply constraints due to conservation, development and damage caused by the Mountain Pine Beetle Demand for wood ber as an alternative energy source
LOW VOLATILITY AND COMPARATIVELY HIGHER RISK-ADJUSTED RETURNS This relative outperformance becomes even more impressive when viewed on a risk-adjusted basis, as the volatility of Real Asset returns has historically been lower than that of equities, while returns have been greater than that of bonds. Importantly, while Real Assets tend to retain value during economic downturns and participate in value creation during economic upturns, performance generally lacks sharp movements in either direction. When combined with the stability of Real Asset cash ows, the resulting risk-adjusted returns have meaningfully surpassed those achieved by either equities or bonds. Exhibit 14: Comparison of Sharpe Ratios across Real Assets and Investment Alternatives
Source: MSCI, Barclays, l Bloomberg, l b NCREIF, S&P Dow Jones Indexes; d d data as of June 30, 2013; Sharpe Ratio based upon 10-year average annualized total returns and standard deviations of performance; assumes a risk-free rate of 3.0%.
The Sharpe Ratio Dened The Sharpe Ratio is a measure of return per unit of risk. The gure is calculated by subtracting a risk-free rate, such as the yield of the 10-year U.S. Treasury bond, from the rate of return achieved from an investment. This net return is then divided by the standard deviation of performance results. The resulting ratio indicates whether investment returns have sufficiently rewarded investors for the level of risk assumed. The higher the Sharpe ratio, the greater the level of risk-adjusted performance.
Real Assets in a Rising Interest Rate Environment Recent developments in global capital markets have led to the potential for rising long-term interest rates, which has brought to the forefront the question of Real Asset performance in a rising rate environment. While we claim no unique insight on monetary policy, our views on the matter have been shaped by our deep experience as an owner and operator of these assets and as an active participant within global capital markets. We rmly believe that Real Assets are uniquely positioned to generate attractive performance across various market cycles, due to their generally stable, long-term, contractual revenue streams combined with considerable leverage to economic growth. During periods of higher nominal interest rates (whether from higher real rates in a more positive growth environment or higher ation low growth environment), grow gr owth th e nvir nv iron onme ment nt o r from from h ighe ig her r in in at atio ion n in a l ow g rowt ro wth h en envi viro ronm nmen ent) t), we believe the increased revenues from these assets will more than offset any potential valuation decline from rising discount rates. In gaining an appreciation for the performance of Real Assets across varying cycles, it is essential to understand the impact of interest rates and ination on each of the main value components of an investment. First, Real Asset revenue streams are positively impacted by interest rates and ination in several ways. Infrastructure and power assets tend to operate under regulated and contractual revenue agreements that span several decades. These agreements often contain either direct, explicit inationlinked revenue increases or revenue growth formulas that are derived from interest rates and/or ination. The revenue streams derived from in-place commercial property leases also tend to perform favorably in higher an inationary y environment, as lease rolls lead to high g er revenues while rising replacement costs lead to higher asset valuations. Secondly, interest rates remain very low and xed interest rate loans enhance equity returns as revenues increase. The economic effect of debt revaluations accrues to owners and can create meaningful embedded value. Long-term, xed rate debt with a low coupon is benecial in a rising interest rate and inationary environment, due to the stable nature of the debt service payments relative to higher revenues. Thirdly, Real Asset expenses tend to grow more slowly than revenues. While the revenue implications of rising interest rates and ination tend to be positive, the impact of expense growth is often more subdued or passed on to end users. Additionally, Real Assets tend to require low sustaining capital expenditures, which helps to minimize overall expense growth. Lastly, in anticipation of interest rate increases, capitalization rates for Real Assets did not decrease as much as xed income yields in recent years. Asset valuations are generally based upon cash-ow projections discounted at an appropriate, risk-adjusted rate of return. This discount rate is, in turn, inuenced by both the level of benchmark interest rates and the level of demand in the investment marketplace for the asset class. We expect that as bond yields rise, Real Asset capitalization rates will lag this movement, as they have maintained wider spreads to absorb interest rate increases. In summary, we expect Real Assets to produce positive and consistent performance and stable cash ows over the long term, irrespective of interest rates movements or capital market cycles. While short-term volatility will ebb and ow, Real Assets will remain the New Essential.
HEDGE AGAINST INFLATION With inationary concerns on the rise, we believe Real Assets represent an attractive investment in long-lived, physical resources that tend to increase in value as land and input costs rise. Additionally, Real Asset revenue streams often respond favorably to higher ination, as shorter term contractual revenues (i.e., one-year apartment leases) benet from frequent resets while longer term lease structures (i.e., 30-year airport concessions) often include regularly scheduled rent escalations linked to ination. Importantly, end-user demand tends to be relatively inelastic and often insulated from ination, due to the essential nature of the goods and services provided by Real Assets. Indeed, demand often increases during inationary periods, particularly when rising prices are spurred by economic growth and improving levels of employment and consumption. As a result of these various drivers, Real Asset returns tend to exhibit greater correlations with ination than traditional investment alternatives. Exhibit 15: Correlation of Asset Class Returns with Ination
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes, U.S. Bureau of Labor Statistics; data as of June 30, 2013; represents the correlation of annualized returns for Property, Timberlands, Agrilands, Bonds and Stocks with historical Consumer Price Index over the duration of data available for each index; represents correlation of quarterly returns for Infrastructure with historical Consumer Price Index given the limited time series of data.
GEOGRAPHIC DIVERSIFICATION Real Assets provide access to a global opportunity set across multiple asset classes. When combined with a variety of investment vehicle options detailed in the following section we believe diversication of investment across geography, currency and asset class can be readily achieved. This diversity can provide enhanced insulation against regional economic trends and cycles. PORTFOLIO DIVERSIFICATION Real Asset returns have historically exhibited low correlations to traditional equity and xed income investments. The addition of Real Assets to a mixed-asset portfolio may therefore provide important diversication benets, lowering overall volatility and enhancing riskadjusted returns. Exhibit 16: Correlation of Real Asset Returns with Equities and Bonds
Stocks Property Timberlands Agrilands 0.23 -0.05 0.11 Bonds -0.08 0.15 -0.03
In an attempt to discern the correlation of infrastructure asset performance excluding the impact of capital market uctuations, an analysis was conducted utilizing a recently established private infrastructure market data series. The Preqin Infrastructure Quarterly Index is calculated based upon cash ow transactions and Net Asset Values as reported by over 130 individual unlisted infrastructure partnerships. While this index dates back only to the rst quarter of 2008, the ve-year life span of this data series has been one of the most volatile periods on record. As such, the results of a correlation analysis utilizing this data should provide a meaningful context. Exhibit 17: Correlation of Private Market Infrastructure Data with Equities and Bonds
Stocks Bonds -0.05
-0.11
Source: Source: Source : MSCI, MSCI, B MSCI Barc Barclays, arclay lays s, Blo Bloomb Bloomberg, omberg erg, P Preq Preqin; reqin; in; da data ta as of Dec Decemb December ember er 31, 31 2012; 2012; represents correlation of quarterly returns of the Preqin Infrastructure Quarterly Index with the MSCI World Index (stocks) and the Barclays Global Aggregate Bond Index (bonds) since the rst quarter of 2008, which is the earliest date for which data is available across all indexes.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents correlation of quarterly returns for each respective index with the MSCI World Index (stocks) and the Barclays Global Aggregate Bond Index (bonds) since the rst quarter of 2003.
We believe the low correlations produced by this analysis are indicative of the relationship between infrastructure asset performance and that of the listed markets. Accordingly, we believe this comparison provides further support for our belief that Real Assets can provide powerful diversication benets for a mixed-asset portfolio. HOW TO ACCESS THE OPPORTUNITY Depending on an investors needs surrounding liquidity, time horizon and capacity to invest, there are a number of options for participating in the global Real Asset investment opportunity. While the specic characteristics of these options vary meaningfully, we believe they share a common ability to provide attractive current income streams and capital growth potential. Exhibit 18: Typical Characteristics of Real Asset Investment Options
Private, Unlisted Funds Unlisted Fund of Funds Listed Mutual Funds ExchangeTraded Funds Private Fund Publicly Invested in Traded Debt Equity Securities Investments
In regards to infrastructure, it is important to note that the proxy for infrastructure asset performance utilized throughout this paper is a listed index. As private market investment in infrastructure is relatively new, having evolved in earnest over the last 20 years, an index of private market asset performance with a meaningful track record does not currently exist. Accordingly, the Dow Jones Brookeld Global Infrastructure Composite Index was chosen as the most appropriate proxy for the asset class. This listed index is currently comprised of more than 125 assetrich infrastructure companies, with a total market capitalization of over $1.0 trillion1 and historical data dating back to December 31, 2002. While we believe this index provides an effective representation of the infrastructure asset class, it does reect the performance of publicly traded equity securities. The listed nature of the index provides many benets to investors, including liquidity, ease of investment and diversity across geography and asset type. However, the index has also exhibited inated correlation levels in recent years, as it has been affected by many of the same capital market trends that have inuenced the equity and bond markets.
Direct Asset Managed Investment Account Ease of Invesment Liquidity Governance Rights Investment Diversication Portfolio Diversication
STRONG
LIMITED
10
These investment options are available across the universe of Real Asset opportunities, with more established asset classes offering a wider variety of investment options. Exhibit 19: Availability of Real Asset Investment Options
Direct Asset Investment Property Managed Account Private, Unlisted Funds Unlisted Fund of Funds ExchangeTraded Listed Mutual Funds Funds Publicly Traded Equity Securities Private Fund Invested in Debt Investments
Capitalizing on the Real Asset Investment Opportunity While the potential benets of Real Assets are readily observable and the options for investment are numerous, the ability to capitalize on the opportunity is more complex. As these assets tend to be large-scale, capital-intensive investments, signicant access to capital is typically required in order to fund initial acquisitions as well as ongoing capital expenditures. As not all Real Assets are created equally, investment sourcing and underwriting play a vital role in understanding the key drivers of asset performance and determining asset value. Factors such as asset quality, location, lease or concession structure, ownership basis and growth potential must all be considered when evaluating a potential investment. operations tend be industry-speci As Real Rea eal l Asset Asse As set t op oper erat atio ions ns t end en d to b e in indu dust stry ry-spe speci ci c and and often ofte of ten n driven by complicated regulations, operational experience is necessary in order to maximize efficiency and productivity. As Real Assets are generally long-lived assets often subject to longlasting contractual agreements, a long-term, patient investment philosophy may be needed to fully realize the value of an investment.
Infrastructure
Timberlands
Agrilands