Russell’s Five Ways to Improve your Portfolio with Real Assets

(January 31, 2014) — As institutional investor appetite for real assets continues to rise, Russell Investments has pieced together its top tips for investing in the asset class.

Concerns about rising inflation and stubbornly low interest rates producing poor bond yields has prompted many investors to revisit real assets, but newcomers to the asset class may feel unsure of the best way to implement them into their existing strategy.

Russell Investments Director Nick Spencer has published his top five ways to get the most out of real estate and infrastructure in investors’ portfolios.

Firstly, he advised that private core real estate are still attractive, especially compared to other fixed income assets, and that it is currently a good opportunity to increase allocations to them, especially if investors employ a global approach.

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“Further enhancements can be sought through smart targeting of the more attractively valued sectors—for example secondary properties in UK,” he said.

“My one caution is on increasing allocations to Continental European core real estate. It currently looks a little early to do this, as we still see risk of price falls in some European markets. However, improving sentiment suggests 2014 may see the final adjustments and thus there could be an attractive entry point later this year.”

Secondly, Spencer suggested that opportunistic real estate funds—longer term vehicles which look to refurbish or develop properties—offer more attractive risk-adjusted returns than core real estate, as there’s a real chance of adding value to existing properties and adding new ones at a discount to market prices.

Thirdly, while the heyday for real asset debt may have passed, strong managers in the UK, European, and global space can still find attractive debts for both property and infrastructure, Spencer advised.

Listed real assets present good diversification benefits, he continued, benefitting liquid equity portfolios and complementing unlisted real assets.

“The attractiveness of listed assets depends on their prices against their prospective valuations. At the start of 2014 our preference is tilted towards listed infrastructure over REITS, but this can evolve through the year,” Spencer said.

However, he was more cautious on the outlook for commodities. “We see potential headwinds in commodity prices from new supply becoming available. As such, I am wary of initiating or extending commodity allocations at the current time,” he said.

Finally, Spencer recommended that investors look beyond property, and expand their real asset holdings into infrastructure, timber, farming, and natural resources.

“Many infrastructure strategies offer the potential for return streams independent of broader markets and commodity prices. These characteristics have led to increased interest in infrastructure and higher prices for larger, less complex investments,” said Spencer.

“The benefits remain, but investors need to be selective to get the best returns. We find attractive opportunities in small to mid-size infrastructure projects and in those requiring operational expertise and specific sectors, such as North American energy infrastructure or European renewables.”

(January 31, 2014) – The largest ever social impact bond has been launched, thanks to investments from Goldman Sachs and several foundations.

The $27 million philanthropic fund will work to prevent young men in Massachusetts from going back to jail or prison. If more people stay out of jail or prison, government funding pays back the donors with a modest profit.

Goldman Sachs pledged $9 million towards the social impact bond, and the Kresge Foundation invested a further $1.5 million.

Another $6 million was invested by the Laura and John Arnold Foundation ($3.7 million), backed by hedge fund billionaire John Arnold, New Profit ($2 million) and the Boston Foundation ($300,000).

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Living Cities, a collaborative of 22 of the world’s largest foundations and financial institutions, pledged a further $1.5 million.

The Massachusetts Juvenile Justice Pay for Success Initiative was announced by the state’s governor, Deval Patrick, as a “smart financial solution” to a difficult problem, according to a report by CNBC.

Non-profit group Roca will work with 929 young men between the ages of 17 and 23 in the state over seven years by providing personal outreach, life skills, and employment training to help reduce recidivism.

If the bond achieves its target of a 40% reduction in re-incarceration, Goldman as the senior lender for the bond and will be paid back the $9 million plus 5% annual interest. Junior lenders Kresge and Living Cities will be paid their base plus 2%.

If the bond exceeds its target, the funders can receive a small return on their funding for assuming the upfront financial risk, including up to $1 million for Goldman Sachs, according to a document issued by Massachusetts state.

The Massachusetts programme is Goldman’s third social impact bond investment. The first was when the bank committed $9.6 million in a partnership with Michael Bloomberg to a New York City jail program in August 2012.

The second came last summer, when Goldman partnered with the United Way of Salt Lake and JB Pritzker to commit up to $7 million to finance preschool in Utah.

“Social impact bonds offer an innovative way for public, private, philanthropic, and non-profit actors to come together and align their skills and resources in pursuit of measurable, positive social change,” said Kristina Costa, an expert on the topic at think tank the Center for American Progress.

“Like all tools, social impact bonds have limitations—but I think they have real potential to help move the needle on some of our country’s toughest social problems, from recidivism to chronic health conditions.”