TIME quizzed 200 financial advisers, wealth managers, discretionary fund managers, fund selectors and investment analysts on their expectations for the coming year.

The researchers found 76% of those surveyed expect to increase their allocation to real estate over the next 12 months, and 74% said the same thing about infrastructure.

In terms of the reasoning, a desire to de-risk portfolios through diversification was mentioned by two thirds of those questioned (67.5%), an increased focus on ESG by 60.5% and a desire for secure income streams was referred to by 44.5% of those taking part.

A somewhat bearish outlook on markets generally has also played a role in forming these plans.

The researchers found 70% of the professionals questioned predicted a challenging economic climate and investment environment this year, and said they do not expect conditions to improve for at least 12 months.

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Andrew Gill, manager of TIME:UK Infrastructure Income, said: “In the short term, we share the view of advisers that uncertainty and volatility is likely to persist.

“However, we are seeing values stabilise in most real estate and infrastructure sectors and the reduction in bond yields seen in late 2023 should support this further. Traditionally, reducing bond yields have been a catalyst for greater investor interest in real assets, making conditions more supportive for a return to growth.

“We have also seen a significant change in market conditions and expectations with UK inflation dropping materially,” Gill added. “This could lead to earlier rates cuts than previously expected with forecasters, such as Capital Economics, moving forward their expectations for central bank rate cuts.

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“With economic growth likely to remain subdued, sectors with robust and growing cash flows, such as real estate and infrastructure, are likely to outperform over the long term. Growing cash flows should also continue to fuel income and dividend increases in most real asset sectors.”

At a time when markets have been buffeting due to inflation, triggering rising bond yields and an uptick in the risk-free rate, some investors have been turning to alternative asset classes including hedge funds, commercial property and infrastructure to provide them to smooth returns and reduce market sensitivity.

Some investors warn against alternative assets accounting for a majority of a portfolio, given their complexity and – often – higher costs. But should investors who have traditionally stuck with the 60/40 split embrace the diversification that alternatives can bring?

Andrew Hardy, head of investment management at Momentum Global Investment Management (MGIM), points out that if done correctly, portfolio diversification can give investors with the ‘free lunch’ of steady and competitive returns, with a lower risk profile than the broader market.

“It rarely pays over the very long term to put all your eggs in one basket when investing,” he tells International Adviser. “That is truer than ever today, particularly after parts of the equity market have really dominated. The US market and the global equity indices are very concentrated and a handful of stocks represent the past winners, when actually the best returns might come from elsewhere.”

When discussing the traditional 60/40 portfolio, Hardy highlights two key problems – the first being a lack of diversification.

He says: “Our strategic asset allocation in portfolios would include credit, inflation-linked bonds, alternatives, precious metals, and most significantly, real assets as well.

“Property and infrastructure in particular have been very valuable over the course of the last couple of years during a period of higher inflation because they have better pricing power, and they can provide better protection in a higher inflation environment.”

The second problem with the 60/40 portfolio, according to Hardy, it their “static nature”, suggesting that even if investors only wanted equities and bonds in their portfolios, there will be times when they want more or less of one or the other.

“This is a period where if we [Momentum] had an equity/bond portfolio we would have been very underweight fixed income for a long time but now we’re moving much more towards neutral to slightly overweight overall.”

Hardy points outs that, although multi-asset portfolios have disappointed over the last couple of years as equities and bonds have lost money, that doesn’t necessarily mean that the idea of combining asset classes should be thrown out with the bath water following a difficult few years. In fact, he says that the argument for having a multi-asset diversified portfolio is stronger than ever in today’s environment.

“We are now in this more ‘normal’ environment and we are in a later cycle environment, where the risks of recession are quite elevated. You are being very well paid within fixed income to take on a bit of diversification and protection within that.”

Choosing alternatives

Alternatives tend to be less correlated with other asset classes, says Hardy, with the least correlated investments across Momentum’s portfolios including hedge funds and market neutral-type strategies.

He says: “The strategy we [Momentum] allocate to there did really well last year, that was up 8% when pretty much everything had fallen significantly. This highlights the benefits that come from that area.”

While real assets do tend to be more sensitive to market sentiment, the likes of infrastructure are often monopolistic and boast superior pricing power, meaning they can better protect against inflation.

Another key area for earning potential that investors can tap into, Hardy suggests, is private assets.

“Over the last 15 years or so more and more companies have chosen to stay private and deferred listing. Klarna, for example, would be one that we [Momentum] have exposure to, the so-called ‘unicorns’ that have multi-billion dollar valuations but no intention to list anytime soon,” says Hardy.

He suggests that investors who don’t have exposure to private assets are potentially missing out on growth opportunities and what he calls the ‘next wave of innovation’.

“Some of the most disruptive, highest growth businesses are staying private for longer so you need a way to access those,” adds Hardy.

Even though alternatives can contribute to the idea of diversification being a ‘free lunch’, Hardy warns they can be challenging due to their illiquid nature, and warns that investors need to be careful to avoid creating a liquidity mismatch in their portfolios.

“Our multi-asset portfolios are daily dealing so, to avoid a liquidity mismatch, we access these assets through listed vehicles, such as investment trusts – closed-ended funds that trade on the stock exchange,” explains Hardy.

UK-listed investment trusts are currently trading at significant discounts to the net asset value ,which Hardy suggests is a ‘really good opportunity’ for investors.

Looking beyond cash

Investors have increasingly been questioning why they should be investing in the likes of equities and bonds when they could be getting 5% on cash sitting in their bank. This means both asset classes have suffered net outflows.

Hardy suggests that the same applies to alternative income-producing asset classes: “In the last ten years or so a lot of money was going into investment trusts because they were able to offer high single-digit yields in many cases, whereas now suddenly there has been a lot of selling pressure in that area, leading to discounts. This has been bad for investors looking in the rearview mirror, as it can mean they haven’t really made that much money.”

Looking over the medium-to-long term, however, Hardy believes that the return potential is actually very good for those buying trusts at a discounted rate.

Stick with multi-asset

Overall, Hardy says that Momentum is telling its multi-asset clients to ‘stick with it’, despite challenging market conditions.

“Don’t be put off by performance over the last couple of years on whatever multi-asset strategy you are using, the benefits of diversification and a long-term approach are truer now than ever and the return potential from here is actually very attractive on a medium-term view from now,” he says.

Hardy adds that investors should not be put off by the risk of recession, as they can create ‘a cycle of creative destruction’ whereby the bad investments are weeded out, while the good investments become stronger.

“If you strip out the performance of the big so-called Magnificent Seven from the global equity market, performance has been very weak so a lot of risk has been priced in already. Therefore, even if you did have perfect foresight that a recession is coming, valuations might be discounting a lot of that anyway so there might not be too much downside,” Hardy points out.

He adds that he is “pretty confident” that inflation is on the cusp of falling and, historically, periods following a peak in inflation have been “incredibly lucrative” for investors.

“It stands to reason that, if inflation starts falling, interest rates can start to come down and historically this has meant very high returns – in many cases double-digit annualised returns – over five years.”

“NRI investors can freely transfer the bonds of IDFs. This lock-in period waiver will make investments in bonds issued by IDFs more attractive for foreign investors.

“If an NRI transfers rupee-denominated bonds of an IDF to another non-resident outside India, such transfer is not regarded as transfer for the purpose of capital gain, and no capital gain tax is charged on such transfer,” said Sajith Kumar, chief executive officer of IBMC International, Dubai-based financial services company.

Many NRIs have made investments in IDFs attracted by guaranteed returns and income tax exemptions.

India’s taxation authority the Central Board of Direct Taxes (CBDT) had amended the tax laws to provide exemption from income tax to IDFs in order to accelerate the flow of long-term debt in infrastructure projects.

Interest received by NRIs and foreign companies from their investments in IDFs used to be charged 5% income tax. The infrastructure bonds offer a decent rate of return and tax benefits.

The maturity of these bonds is often between 10 and 15 years with an option to buy-back after a lock-in period. Tax-free bonds public issue is open for NRIs to subscribe on both repatriable and non-repatriable basis.

The earlier stipulation was that the investment made by an NRI in infrastructure bonds should be subject to a lock-in period of three years except where transfer is made to another non-resident. However, NRIs were allowed to trade among themselves within the lock-in period.

Effective investment vehicle

The decision to remove the lock-in period condition is aimed at further boosting foreign investment in the infrastructure sector as IDFs are investment vehicles to accelerate the flow of long-term debt to the sector. This will also result in increased funding in the infrastructure sector.

It was also stipulated that IDFs set up as non-banking financial companies (NBFCs) may invest in debt securities of only public private partnership (PPP) infrastructure projects which have a buyout guarantee and have completed at least one year of commercial operations.

IDFs set up as mutual funds would invest minimum of 90% of its funds in debt securities of infrastructure companies or special vehicles across all infrastructure sectors, project stages and project types.

Betting on investment flow

India, betting on higher investment flow to the infrastructure sector to prop up the faltering economic growth, has set out a plan to invest INR100trn ($1.4trn; £1.13trn; €1.28trn) in the sector by 2024-25. A task force has been set up to identify infrastructure projects for the investment.

A recent media report said that the government can look at issuing infrastructure bonds via a special purpose vehicle, which could mop up over INR 950bn ($13.37bn; £10.74bn; €12.16bn).

NRIs can expect a host of such infrastructure bond issues, offering attractive returns on long-term investments and tax breaks.

This is according to Reaves Asset Management, which sat down with International Adviser ahead of the announcement it is launching a Ucits US Utility Fund.

A well-known name in the United States, where it has operated for 41 years, the company is a newcomer to the international market.

Pool of opportunity

Subject to regulatory approval, the Reaves Utility Income Ucits fund will be domiciled in Ireland and managed by MontLake Management, with a team of portfolio managers at Reaves providing investment management services.

Using a bottom up, best ideas approach; it offers investors the opportunity to gain exposure to “highly liquid, publicly listed equities in the US utilities sector”.

Jay Rhame, chief executive of Reaves, told IA: “We focus on heavily regulated industries, where there is less competition and more opportunity to do well.”

The fractured nature of the US sector, compared to the more monopolised European utility landscape, means there are more companies to choose from, he added.

The fund will invest on a long-only basis in equities and equity-related securities of US utility companies involved in infrastructure-related products, such as electricity, gas or water, telecommunications and energy companies.

It is aimed at institutional, family office and retail portfolios and will be available in USD, GBP, CHF and Euro share classes.

Holding investors back

Utility companies have not traditionally been something that has incited much investor excitement.

Rhame highlighted concerns around rising interest rates and misconceptions of the regulatory impact on utility companies as perceived barriers for investors.

“Interest rates are a factor, not the factor,” he said.

Ron Sorenson, chief investment officer and portfolio manager, added: “GDP growth is irrelevant, the sector has tremendous resilience to recessions.”

Noise coming from the Federal government and the White House about infrastructure projects and a return to coal should also not put people off investing in US utilities, the pair added.

Rhame said: “The Federal government has very limited power over utility companies, as the individual states can have their own targets.”

Meaning that comments from Donald Trump have less influence than those coming from a state’s governor.

“There is also a misconception that utility companies don’t grow,” said Sorenson.

Pillars of need

In addition to utility companies, the strategy also has exposure to communications and energy companies.

As the company explained, no modern economy can survive without these three sectors.

David Storm said in an interview with International Adviser: “We can see the most investible areas are around water and energy.

“Infrastructure is a big area that you can make money in. Clean energy and clean water have an infrastructure angle.”

He also flagged up waste management linked to agriculture, but not agriculture itself.

“Infrastructure companies tend to have far more steady cash flows, they can deliver cash out to clients; and, as we are in a very low interest rate environment, this can be very attractive for portfolios.

“Most green bond issuances are around infrastructure, as we are going to constantly focus on the infrastructure to deliver on climate change initiatives.”

This comes months after the firm released its nine key megatrends that will have a big impact on the investment philosophy of the future.

Research by global management consultant McKinsey found an estimated $57trn (£43.6trn, €49.7trn) will need to be invested in infrastructure globally through to 2030. This total encompasses investments for transportation, power, water and telecommunications, and to put this in context, it exceeds the existing value of the world’s entire infrastructure.

Megatrends

The geopolitical and global macroeconomic developments that have emerged in the past few years, including trade wars and Brexit, have created uncertainty for investors.

Increased market volatility, fluctuating currencies and conflicting actions from governments around the world have made the idea of investing or switching portfolios less appetising.

But there has been a continuation of several global megatrends that are altering the world. These include large shifts in economic, social, political, environmental or technological areas that can be slow to form but last for decades; influencing governments, society and business.

IA asked Storm whether there is demand for this so-called megatrend investing, and whether the firm has an offering for clients.

He added: “All ages of clients are looking to invest in megatrends. Our high net worth individual clients are used to being exposed to tech devices. It is beyond generations the way people are thinking of investing in this stuff.

“Megatrends are in all of our portfolios to some extent. Last year we made a few explicit investments around megatrends but got across all of our portfolios.

“But you also pick up on the secondary exposure, with the ESG-dedicated portfolios that we have the fixed-income pieces are around green bond. We have explicit investments into green bonds and specific bonds that are specifically screened for ESG credentials.

“Clients whether they have these long-term horizons or not, they also think in terms of quarters, weeks or months. We are already invested short and long term with clients. We think these megatrends help frame the future for clients and allow them to make longer term choices.”