Vince Childers, head of real assets multi-strategy at Cohen & Steers, answers PA’s questions.
- Describe your career background; how did you find your way into real assets investing?
Early in my career, I worked in portfolio management for Sanford Bernstein and ultimately re-joined AllianceBernstein, getting back into research, after business school and a stint in investment banking.
After the financial crisis, an inflation-related project I’d been working on with a colleague evolved into one of the early diversified real asset strategies in the market. I co-managed that portfolio for several years and we grew from effectively nothing to more than $2 billion of assets.
In 2013, Cohen & Steers reached out to me looking for someone to lead their diversified real assets business. The chance to join one of the world’s leading managers of listed real assets made my decision pretty easy. The firm had launched the world’s first listed real estate securities mutual funds and subsequently expanded into infrastructure, natural resource equities, and commodities.
My task was to bring together the best of each of these capabilities in the form of a multi-strategy real assets portfolio and further grow what we think is both a unique and highly attractive value proposition in real assets for investors globally.
- What is the broad strategy you have in place?
Our real assets strategy is focused on providing investors with a portfolio that should work as a sensible, long-term allocation to the asset class. The strategy is built around a range of core liquid, exchange-traded real asset categories, including global real estate, commodities, global infrastructure, and natural resource equities.
By combining a diversified array of assets, each with unique return drivers and inflation dynamics, the goal is to provide dedicated, strategic exposure to real assets in a way that delivers attractive long-term risk-adjusted returns, inflation sensitivity, and potential diversification benefits with respect to the investor’s broader asset allocation.
Most of our value-add as an active manager comes from our investment teams’ bottom-up sector and security selection capabilities, but we also combine this with a top-down asset allocation approach that aims to add additional alpha and, as importantly, focuses on risk management at the level of the overall portfolio. Ultimately, we think there are few strategies available in the UK offering a managed solution to global, listed real assets in a single strategy that’s comparable to what we’re doing here.
- Why should investors allocate some of their portfolio to real assets, in your view?
Historically, bouts of unexpected inflation—especially when driven by supply-side factors in the economy—have resulted in both stocks and bonds tending to deliver below-average returns. Conversely, diversified real assets have typically delivered above-average returns when inflation is surprising to the upside, making them a potentially potent diversifier.
I’d argue much of 2021 and 2022 served as a stark reminder of these risks and sensitivities. From here, we think it’s not unreasonable to worry that we’re facing a regime ahead of what we’re calling ‘secular stagflation’, an environment of slow growth and elevated, supply-side driven inflationary risks.
This is precisely the kind of backdrop in which real assets can add value to most asset allocations. I’d add also that it doesn’t hurt that we continue to see pretty compelling valuations for most real assets relative to broader equities.
- Where are the best opportunities in real assets at the moment, in terms of asset types and geographically?
Being focused on relative value at the moment, we currently favour natural resource equities, as all sectors—energy, agriculture and mining—and the asset category overall presents a compelling deep value opportunity. We also like the value we’re seeing in global infrastructure, and with most infrastructure businesses generally able to pass rising costs along to consumers we like the group’s growth prospects against a still-inflationary backdrop.
We currently have a tactical underweight in commodities, primarily due to concerns around commodity spot price volatility. However, we believe commodity markets have more than priced in a mild global recession scenario and that the category has solid longer-term fundamental, macro and valuation support.
While we’re underweight in global real estate, this really has more to do with the value on offer in some of the other core real assets. But with the correction in share prices, we have seen vastly improved valuations and think real estate is now also offering attractive return potential, especially relative to broad equities. Overall, again, we like the value opportunity across most of the real assets universe.
- What are the most important characteristics you look for when investing in a new asset?
On the whole, I’d say we’re pretty valuation and fundamentals focused. While all of the portfolio managers and teams who manage the underlying asset categories or ‘sleeves’ of our diversified strategy have their own distinctive styles, when we look at active risk, for example, a common denominator is that we don’t like to see much of it coming from explicit risk factor tilts.
We want to see true, bottom-up, ‘idiosyncratic’ alpha. From my seat, the preference is much the same: when I’m putting together our over- and under-weights I’m largely looking for relative value within and among the core real asset categories.
- Could you describe your overall outlook for the global economy over the next one to two years, and what this implies for real assets?
What we’ve seen so far in the post-Covid era is that virtually no one is getting the inflation call correct. The consensus keeps predicting a rapid normalization back to central bank inflation targets. But here we are with multi-decade low unemployment and strong wage growth across much of the developed world. Is it really any wonder that we’re seeing so much stickiness in the core inflation measures? I don’t think so.
Our base case is that we’re going to be dealing with recurring bouts of inflationary pressure over the next couple of years. And much of this will be driven by periodic negative supply shocks emanating from both the labour and goods markets, as well as the commodity markets themselves. If history is any guide, it’s precisely when these kinds of stagflationary dynamics take hold that the diversifying power of real assets really comes to bear.
