LGIM Real Assets (Legal & General) says that returns in 2018 are set to favour more defensive portfolios, whilst an uncertain outlook highlights a need to balance resilience with optionality. Legal & General says occupier engagement key for 2018 and beyond.
10 Jan 2018
This means that in shaping portfolios, Legal & General is focusing on building resilience against potential weaker economic conditions, whilst retaining sufficient growth potential to deliver in more benign environments.
Consensus expectations for GDP growth are for a further slowdown in 2018, weighing on rental growth prospects. With the low rates environment a powerful anchor for yields at current levels, consensus expectations for five year market returns are in the mid-single digits, founded almost entirely on income.
This consensus inevitably reflects a particular path for politics, policy and the broader global economy in the coming years. This means that the range of outcomes has widened. For Legal & General this calls for a hedging approach.
More defensively positioned portfolios, and those where managers have been focusing on assets which are positioned to meet occupier needs, will be the winners in the short- term. The next twelve months are likely to see underperformance for assets which are highly geared to the economic cycle.
Longer-term, Legal & General sees two broad strategies for delivering resilience and optionality. Long-income portfolios are a contracted income approach. The long lease creates a bond-like cash flow that is relatively immune to recessions. Equally, portfolios where the income is indexed to inflation can deliver growth as well as contributing to liability matching for institutional investors.
The second broad approach is founded on identifying income which is resilient not because of the protections provided by leasing contracts but the fundamentals of the buildings themselves. A number of alternatives can be viewed as being needs-based and hence less exposed to the economic cycle, residential being the best example.
In the core sectors, there are a cocktail of factors that investors use to understand the resilience of demand; they all start with meeting occupier needs. The layout of buildings, the ability to refit them economically and their location in their locality are all important. Moreover, identifying towns and cities which are positioned to grow their populations and local economies should underpin long-term resilience and investment performance.
Rob Martin, Research Director at LGIM Real Assets, commented: "2018 could take a number of paths and inevitably there are many unknowns. Winners will be those investors who not only have resilient assets to protect them against downside risk, but can also adapt to capture growth potential if occupier demand surprises to the upside. The thread running through all of this is the need to understand and respond to occupiers, and meet their evolving requirements."
LGIMRA is a division of Legal & General Investment Management (LGIM), one of Europe’s largest
institutional asset managers and a major global investor. LGIM manages £1.29 trillion1 ($1.57tn) in
assets, working with a range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
LGIM Real Assets has assets under management of £36 billion2 ($43.8bn) and is one of the largest
private markets investment managers in the UK. Investing in both debt and equity and across the
risk/return spectrum, LGIM Real Assets actively invests in and manages assets across commercial,
operational and residential property sectors, as well as infrastructure, real estate, corporate and
Taking a long-term view in order to future proof our investments, LGIM Real Assets continues to lead the industry in ESG performance, considering all environmental, social and governance issues at asset level as well as portfolio level.
1LGIM internal data as at 30 June 2022. These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data includes derivative positions.
2Source: LGIM Real Assets. AUM data as at 30 June 2022.
*at 13 Jan 2023
For professional clients only. Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of LGIM as at 12 January 2023. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.2 trillion in total assets under management* of which 39% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.
*as at HY 2023