Fund opens door to two asset classes with stable and predictable cash flows and opportunities for growth
The actively managed Dynamic Real Estate & Infrastructure Income II Fund is an alternative version of its original, which has a nine-year track record, an attractive risk-reward profile and returns above several broader market indices.
Non-accredited investors are now able to take advantage of the portfolio, investing in real estate and infrastructure, which are areas that are in high demand among pension funds and institutions. Rolled out in April, the fund has about $156 million assets under management, with a management fee of 1%.
Tom Dicker, Vice President & Portfolio Manager, knew that the regulatory and administrative burden of purchasing an offering memorandum was a significant barrier to many investors. He joked that the availability of liquid alts was “our regulatory fantasy becoming reality” and said the fund’s immediate success had proved what he already knew.
He said: “This fund clearly screens very well for investors that are looking for a real estate or infrastructure fund, or for people that are looking for a liquid alt that they just weren’t able to access [previously]. It has obviously been a huge success so far.
“We were able to introduce this product to the marketplace with a very strong track record to begin with, not just in real estate and infrastructure combined, but also real estate and infrastructure as standalone offerings.”
A history of success is important for investors and Dicker said the liquid alt fund offers a number of benefits. Fundamentally, real estate and infrastructure are two asset classes that have stable and predictable cash flows which grow over time, as well as having the ability to pay a reasonable and growing dividend.
These dividends are attractive relative to bonds and there has been a lot of demand from the private market, which has a large amount of dry powder on balance sheets, in both infrastructure and real estate elements.
Another attractive trait of these two asset classes is the low correlation with the broader market indices, which in the original fund is between 0.4 and 0.5. This diversification element enables a smoother return when added into a stock-bond-cash portfolio.
Dicker said: “Its defensiveness in bad market periods resonates with folks. The idea that if stocks go down, the earnings are very unlikely to go down is something we emphasize and something that lets us and our investors sleep at night.”
Frank Latshaw, Portfolio Manager, said that the fund also applies leverage to the investments and believes the fund offers long-term total return potential and not simply a temporary safe port in the storm. Institutional arrangements with prime brokers mean it can also borrow money on margin more cost effectively than the advisor community could do alone.
Latshaw added that the process to construct the infrastructure element of the fund is based on a strictly conservative definition of what infrastructure actually is, featuring the likes of utilities, water, electricity, power, airports and toll roads.
Dynamic then adds a quality filter, ensuring stocks feature good management, balance sheets, and a track record of disciplined capital allocation.
He said: “The infrastructure investments also have to have growth. There’s plenty of good quality, properly defined infrastructure stocks out there, but if they don't have growth opportunity [we don’t include it].
“We see a lot of growth opportunity in infrastructure, in general, because it's an asset class that has been underinvested in over time. We need to see a lot more investment around the world just to replace old and aging infrastructure. That spells growth, but it's not the case for every infrastructure stock out there. We have to have visible long-term potential and they have to have discipline.”
Maria Benavente, Portfolio Manager, said the real estate section of the fund focuses on institutional quality assets and portfolios that are extremely well located in cities that are seeing strong job growth where it’s hard to build. This means very low vacancy rate and high rental growth.
Canadian residential and seniors housing are also favoured. Benavente explained: “We think the demographics are positive. We're seeing a lot of positive immigration, positive rent growth and very low vacancy rates.
“We like Canadian seniors housing. Again, the demographic is very strong with the seniors population set to grow at four times the rate of the national growth rate. And we like industrial, which has a very positive tailwind from the continued growth in e-commerce.”
The fund is positioned to be a long-term hold in portfolios, offering exposure to two stable asset classes that have the ability to provide a reasonable and growing dividend over time. Add in the diversification and low correlation aspect, and the track record Dynamic Funds brings to the table, and investors can also take advantage of its defensive characteristics amid increasing market volatility.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular company, security, industry or market sector are the views of the writer and should not be considered an indication of trading intent of any investment funds managed by 1832 Asset Management L.P. These views should not be considered investment advice nor should they be considered a recommendation to buy or sell.
Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.