Canada Life partner Vince Childers of Cohen & Steers discusses the opportunities of real assets during an unpredictable inflation environment
This article was provided by Canada Life Investment Management
Rapid inflation and high interest rates have many investors wondering what comes next. But for others, the ongoing uncertainty is the perfect opportunity to generate positive returns.
Vince Childers, a lead portfolio manager at Cohen & Steers, says an unpredictable inflation environment can make real assets such as infrastructure and raw materials an attractive alternative to fixed income and conventional equities.
Metals, energy and other raw materials are often the first goods to respond to shifts in supply and demand, he explains. This allows investors to act on the earliest flickers of inflation, before price changes show up further down the supply chain and across the broader economy.
“These assets are sensitive to inflation, particularly unexpected changes or inflation surprises,” he told Wealth Professional during a recent interview from his office in New York. “Real assets can deliver above average returns against these surprises.”
The wide variety of real assets provide a host of other investment opportunities as well; including the steady income of rental properties and toll roads, a flight to gold when currencies devalue, and rising energy prices as economies recover.
With the opportunities in real assets almost as varied as the assets themselves, Canada Life recently moved to increase its access to these opportunities via the launch of the Canada Life Diversified Real Assets Fund together with Cohen & Steers.
Since its founding in 1986, Cohen & Steers has emerged as one of the world’s leading managers of real asset investments, with total assets under management of more than US$80 billion.
Childers explains that while much of the firm’s success comes from understanding a broad variety of assets, it’s just as important to identify the opportunities they have in common.
“These assets seem so disparate, it can be hard to see what ties them together,” Childers says. “For me, it’s the sensitivity to inflation shocks, particularly if they’re supply driven. These kinds of episodes tend to be very difficult for traditional stocks and bonds, but they are much more advantageous for real assets.”
Some observers believe the volatile inflation environment of the last two years may be subsiding, but Childers disagrees. He says there could be more surprises on the way – and that makes real assets an ideal investment opportunity in the months to come.
Types of real assets
Before expanding on his outlook for continued inflation uncertainty, Childers explained the four key categories that make up real assets.
The first are global real estate securities, which include the owners and operators of commercial real estate around the world. These would involve real estate investment trusts (REITs) as well as a wide range of property assets such as self- storage, offices, retail holdings, hotels, data centres, and apartments among others.
The second category includes commodities such as energy, oil, natural gas, base metals, copper, nickel, and precious metals like gold and silver; as well as agricultural products such as grains and livestock.
Third is global resource equities, which would be equity investments in those companies that own and produce commodities such as energy, metals and agricultural goods.
Finally, there is a very diverse group encompassing global listed infrastructure. Here, Childers is referring to investments in transportation, utilities, and communications. This category includes a wide range of infrastructure from midstream energy transport to cell towers to toll roads in Europe.
It’s a lot of ground to cover for a portfolio manager. But for Childers, their shared sensitivity to changes in inflation provides a compelling argument for savvy investors.
Which brings us to an important question for these investors today. After an exceptionally volatile period for inflation, are we returning to stability?
More surprises to come
While Childers agrees that we’re seeing rapid inflation begin to moderate lately, there are lessons from the past that suggest the worst may not be over.
“If you look at historical inflation cycles, you don’t see a straight line of change,” he says. “It’s more cyclical. In the 1970s for example, inflation accelerated until it came back down and everybody thought it was beat – and then it came back and took everyone by surprise.
“I see a risk of recurring bouts of inflation for the next two, five, and even 10 years.”
Childers bases his assessment on the idea that the world has changed since the long disinflationary period between the financial crisis in 2008 and the recent lockdowns. From a period of abundant supply – whether it was labor or commodities – Childers believes that the world has shifted to more constraints on this supply as waning globalization impacts access to workers and raw materials.
“We’re vulnerable to negative supply shocks as companies reshore, commodities face under-investment, and people grow more skeptical of government deficits,” Childers explains.
He adds that these types of underinvestment cycles have historically laid the foundation for inflation pressures down the road, especially if combined with demographic changes that could reduce labor supply and increase the stickiness of wages.
“These pressures will wax and wane,” Childers says. "But I’m not expecting a return to the great disinflation era we saw up to the pandemic.”
Where to invest now?
Childers says he has two key investment approaches as a portfolio manager.
One is to build a sensible long-term strategy for the different real assets. And two is to add value above and beyond this strategy with more active trading over a 6-to-12-month horizon.
Asked where he’s looking for opportunities now, Childers points to resource equities which are benefitting from ample cash flow. He also believes there are attractive prices to be found in infrastructure, where they have moved to a more overweight position. He’s less bullish about real estate however, which seems to be more vulnerable to rising capital costs.
The Canada Life Diversified Real Assets Fund provides investors with an attractive alternative to conventional stocks and bonds because it can benefit from future surprises with inflation.
“An intelligently constructed portfolio of real assets gives you a really good balance of inflation sensitivity, diversification, and risk-adjusted return,” he says.
And this is especially true now, Childers adds, because the markets have yet to price in the risk of continued stagflation.
‘We're still grappling with the idea that the world has changed,” he says. “We’re facing a greater risk of supply-led inflation and we still haven't adjusted.”
Want to get more insights on real assets?
Canada Life Investment Management Ltd. brings together leading investment managers to offer a relevant and diverse fund line-up that meets your needs through today’s changing market dynamics. Register today for the Canada Life™ Portfolio Manager Connect Series. Our comprehensive event line-up features a range of viewpoints, investment philosophies and asset class expertise.
- Oct. 12: Cohen & Steers – Canada Life Diversified Real Assets Fund
- Nov. 9: Irish Life Investment Managers – Risk Managed Portfolios
- Dec. 7: Putnam Investments – Canada Life U.S. Value Fund
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This interview is part of an ongoing series about Canada Life’s approach to investing with its partners around the world. Previous stories discussed value investing, fixed income, performance and emerging markets).
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