Portfolio optimization is an area where RBC GAM has been building its expertise for over 35 years. The incorporation of new asset classes is an ongoing process and potential investments are assessed based on their impact on risk and returns, as well as their contribution to overall diversification. In this Q&A, Sarah Riopelle, Vice President & Senior Portfolio Manager, Investment Solutions, is joined by Andrew Hay, Lead Portfolio Manager & Head, Global Infrastructure Investments, to share their perspectives on a unique alternative asset class and the newest addition to the RBC Portfolio Solutions.
Q: How have your portfolios evolved to incorporate alternative assets over time? Can you tell us about the most recent addition to the portfolios?
Sarah: The journey toward becoming a global asset manager has been one of constant evolution of our solution set. This is best reflected in our Portfolio Solutions. We are always on the lookout for new asset classes and strategies that can enhance our value-added capabilities (Figure 1). We began investing in alternative assets in 2019, with allocations to the RBC Canadian Core Real Estate Fund and BlueBay Global Alternative Bond Fund.
Last month, we made our first allocation to the newly launched RBC Global Infrastructure Fund LP, managed by Andrew Hay and his team. Infrastructure includes airports, toll roads, mobile-phone towers and other assets that support economic activity and daily life. The RBC Global Infrastructure Fund provides investors with direct access to a globally diversified portfolio of high-quality private infrastructure assets. We now invest in this new asset class across 22 of the multi-asset solutions that we manage, including RBC Select Portfolios and RBC Global Portfolios.
Figure 1: Further expanding our exposure to alternative assets
Note: As of November 2023. Source: RBC GAM
Q: Congratulations on the launch of the RBC Global Infrastructure Fund and completing your first two investments. What defines a good investment in the infrastructure space?
Andrew: Thank you, we are grateful for the support of RBC GAM colleagues and the trust of our clients after launching the Fund earlier in the year. We are also really pleased to have completed the first two private infrastructure investments, the first in mid-October and the second in mid-November. We view these as a high-quality start to the Fund’s investment program.
Investments in private markets, such as infrastructure, have grown in popularity in recent years. Investors are excited for the addition of a private-markets asset class that brings low correlation to other strategies in their portfolios. This Fund provides them with another portfolio-construction tool that enhances diversification.
We look for investments that fit into several defined sectors (Figure 2). Fundamentally, the infrastructure companies that we invest in are usually comprised of large, tangible (real) assets. The operation of these assets by a company contributes to the goods and services that enable our daily activities. Examples include a utility company that provides fresh water or electricity, or a major airport.
Figure 2: Infrastructure – a diverse opportunity set
Our screening criteria include:
A core/core+ risk profile that’s at the lower end of the risk spectrum, often viewed to sit between fixed income and equities.
An investment operating in developed markets where there is a proven regulatory model, established rule of law, stable monetary policy and a commitment to Environmental, Social and Governance (ESG) integration.
An investment that has a clear value-creation thesis under private ownership. This could be, for example, a growth story for which public markets may not recognize the value of reinvestment of operating cash flows into growth areas if this reduced near-term dividends.
Fundamentally, we’re looking for investments that provide steady and predictable cash flows to investors. This is usually because they are providing a good or service that is an essential part of daily life.
Q: Looking ahead, what do you see as the most promising opportunities for infrastructure investors?
Andrew: There is a lot of potential deal activity out there, which allows us to be highly selective. For example, the investments that we’ve moved forward with represent less than 5% of the total deal volume that we’ve seen in 2023.
Some examples of the many themes we are looking to participate in include:
Digital infrastructure: Robust digital infrastructure, from broadband networks and data centres to newer concepts like edge computing, form the backbone of modern economies and will be critical for sustained growth.
Energy transition: As the world seeks to mitigate climate change, there will be massive investment required in renewable energy assets such as wind and solar farms along with the transmission lines to connect new generation to the grid.
Transport modernization: Many developed countries have aging transport infrastructure. This presents opportunities to replace, upgrade and modernize transport networks with smart technology, autonomous-vehicle compatibility and sustainable designs.
We spend a lot of time thinking about how best to access these and other trends, as sometimes the hottest trends are also the most expensive. We think about absolute and relative value to help screen and prioritize investment opportunities, and in all cases, we’re looking for strong alignment with the Fund’s strategy.
Q: What are some complexities related to investing in alternative assets and how can portfolio solutions help?
Sarah: While all investments have their share of complexity, alternative investments have a unique set of challenges versus traditional publicly traded assets like stocks and bonds.
First, many alternatives require substantial minimum capital commitments, often exceeding the means of individual investors. Additionally, these investments often have limited liquidity, meaning that it is difficult to buy and sell them. Portfolio solutions can help to alleviate these hurdles, as we have an experienced management team that will tackle those challenges on our clients’ behalf.
Another critical decision that is often overlooked involves determining which asset class or strategies should be sold in order to fund the allocation to alternatives. This goes back to the concept of portfolio optimization.
Q: What are your expectations for infrastructure over the next 12 months?
Andrew: Many infrastructure investments are positively correlated with inflation or interest rates. This includes toll roads and regulated utilities, for example. We consider toll roads highly desirable, especially as traffic recovers from the pandemic.
There have been strong regulatory and legislative tailwinds to renewable power generation. In the U.S., the Inflation Reduction Act solidified long-term government support to an industry that had previously been subject to annual renewals of certain support mechanisms. The law de-risked some investment in this sector.
However, we’re also seeing an increased awareness of issues such as affordability and reliability. Power generation and heating fuels were disrupted over the past 18 months, especially in Europe. In addition, the resiliency of supply chains has come into focus, which had moved from a “just-in-time” to a “just-in-case” inventory model through the pandemic.
High-quality infrastructure investments tend to hold their value over time given their often high barriers to entry, and this characteristic can help to manage performance risks in volatile periods.
Q: How can alternative assets help diversify your portfolios in today’s markets?
Sarah: In today’s market, alternative investments can provide investors with valuable opportunities to diversify their portfolios and help enhance returns while managing risk. Alternative investments often exhibit low correlations with traditional stocks and bonds. For example, our allocations to the RBC Canadian Core Real Estate Fund and BlueBay Global Alternative Bond Fund have demonstrated their diversification benefits, outperforming in a period where traditional bonds and stocks have struggled. In addition, these strategies hold very long-life assets so they are not as influenced by short-term market factors, making them a valuable offset against near-term volatility.
Alternative investments can also offer access to unique investment strategies that may not be available through conventional asset classes, helping investors better navigate the complexities of today’s dynamic financial landscape. By incorporating alternative investments, investors can build a more resilient and relevant portfolio equipped to better withstand economic and market fluctuations. However, it’s essential to carefully consider your risk tolerance and investment objectives when adding alternative assets to any portfolio.