HOW TO PLAY IT-Canada money managers eye real assets for diversity

Reuters

* Real estate, precious metals, energy offer portfoliodiversity

* Real assets used to be inaccessible to all but wealthy

* Assets need long-term view hand

By Andrea Hopkins

TORONTO, Oct 10 (Reuters) - When Canada's big pension fundsstarted to diversify out of stocks and bonds, they turned toreal assets in a bid for better returns. But buying real estate,infrastructure and commodities isn't just for big playersanymore, and Canadian asset managers are offering them toordinary clients.

After years of putting inflation worries on the back burnerbecause global growth is subdued and interest rates are athistoric lows, money managers are rolling out more productsaimed at protecting against inflation and spreading risk.

"I really believe everybody should have some access to realassets. It primarily goes back to preservation of wealth and thepossibility to create wealth as well. It's got the inflationprotection that other types of assets may not give you," saidSteve Yuzpe, chief financial officer at private equity firmSprott Resource Corp.

Canadian pension funds now typically hold 17 percent to 25percent of real assets buying pipelines, farmland, energy andgold getting a return on investment that has long attractedanyone wealthy enough to be able to afford such things.

When he managed the money of wealthy families, Som Seif sawhow real assets played a role in their portfolios. Now, theCanadian exchange-traded-fund (ETF) pioneer and founder ofPurpose Investments wants to provide the same access to allCanadians, but at a lower cost.

"A billionaire family is always thinking about protection ofwealth versus enhancing wealth. They want to grow their assetand protect the downside," said Seif, who opened five, low-feefunds including the Purpose Diversified Real Asset Fund, available as an ETF, last month.

Seif said his(?) diversified fund which invests across fivemain real asset categories - agriculture, base metals, preciousmetals, energy and real estate - is better than picking a goldETF, a REIT, an energy ETF and the like, because Purpose'sactive management regularly rebalances the fund according toquantitative rules, not investor-driven emotion.

Seif also includes both physical assets like gold, silver,oil, corn, soy and cash in the fund, as well as the companiesthat produce such assets or manage them, like RioCan REIT, Monsanto Co, and Teck Resources Ltd.

"We are trying to think like the most intelligent pensionplans think, and bring it to the market," said Seif.

Toronto-based Russell Investments Canada also entered thereal asset space this year, opening the Russell Real AssetsPortfolio in May. The fund, available through advisers toclients with at least C$25,000 in their account, invests inglobal real estate, infrastructure, a commodity index andreal-return bonds.

"On the infrastructure and real estate side, with thoseexposures we think you get a lot less volatility than coreequities. They are more defensive properties," said Greg Nott,chief investment officer at Russell.

"We're talking about bridges and airports and toll roads -the volatility around those businesses and their earnings andrevenues are a lot less," he said.

Don Coxe, a portfolio adviser to BMO Asset Management, saidthe obvious benefit of a real asset is scarcity. The resource isnot renewable. And while commodity prices are going to cycle upand down, the hunger for the underlying commodity from a countrylike China is not going to go away.

Funds like the Coxe Commodity Strategy Fund andthe Coxe Global Agribusiness Income Fund alsodiversify a portfolio away from inflation-sensitive equities andbonds, he said.

"This is an asset class that will tend to give you betterperformance when the rest of the equity markets aren't doing sowell because there is rising inflation," said Coxe.

While Sprott Asset Management has a swath of funds to getinvestors into real assets, Yuzpe said buying shares of SprottResource Corp can also do the trick, because the company investsin private companies that are often accessible only to privateequity players.

"Funds in general have trouble investing in privatecompanies...So this is a way for individual investors like youand me to invest in (a) private equity class that is typicallyonly open to institutional investors," he said.

Yuzpe and the others agree on one thing: investing in realassets requires a long time frame and an unemotional approach.Commodity prices can swing wildly for good reason and for noreason, and investors tend to get burned by buying high andselling when everyone else does.

"I do think they need to keep a relatively long-termperspective with real assets," said Russell's Nott.

"We've had a number of years with no inflation risk, and Idon't see much even for the next few years. But at some pointwe're going to see stronger economic growth, the market willprice in some inflation concerns and that's when we'll see someof the merits of (holding real assets)."

View Comments