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."
Notes to editors
Legal & General Investment Management Real Assets (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 £1.28tn in assets (as at 31 December 2020), 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 £36.3bn (as at 31 December 2020) 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 alternative debt.
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. In 2021, we are implementing a strategy as part of our commitment to net zero carbon emissions across the real estate equity business by 2050, and have also committed to measuring social value across 20% of our platform by the end of the year.
(As of June 2021)
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Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.4 trillion in total assets under management* of which a third is international. We also provide powerful asset origination capabilities. Together, these 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. Through inclusive capitalism, we aim to build a better society by investing in long-term assets that benefit everyone.
*at 31 Dec 2021