News

Really Keeping Up

by Chris Andrew
13/02/2018
Really Keeping Up

If you turn to the business pages of most Sunday papers you will invariably see a table that shows how much £1,000 invested in a certain equity market would have grown over the last ten, twenty or thirty years if you permanently held it. The return on your investment can frequently be as much as ten times the value and, if you are like me, this will tend to annoy you, as I will rarely find myself in such a lucky position. But things may not be exactly as they seem.

What these return multiples are giving us, is the price return of an asset; it does not give us the real return. What do I mean by real return? I mean the return an investor actually achieves after inflation. Inflation is always the missing ingredient. For example, if you lived in Brazil and invested in the stock market and made 10% in a year, but inflation was running at 12% per year, you would have made a loss of 2% in real terms; your money would not have kept up and would have lost some of its purchasing power.

Closer to home, we have an even better example. Savers with money in the bank have been ‘enjoying’ annual interest rates well below 1%. This is at a time when inflation has been running higher; as of now it is running at nearly 3%. Therefore, savers are being offered a choice between a negative real return for leaving their money in the bank, or the riskier choice of investing the money into the traditional equity markets.

The UK is a very good example of how the price return is often an illusion. From 1970 to 2011, the FTSE 100 has risen by 14.2%. Therefore, if you had invested £1,000 in 1970 it would have been worth £14,200 at the end of 2011. However, inflation (as measured by CPI) had gone up by 13.3%. Therefore, the real return multiple was 1.1% – your £1,000, on 41 years, had grown in real terms to £1,100.

Unfortunately, the news does not improve. How many people just want to keep up with basic inflation? Yes, it protects our money but what about those aspiring investments that are growing by more than inflation? The two clearest examples of such items would be private education and private healthcare; people want to educate their grandchildren and have money for their old age. A year’s fees at Harvard in the USA in 1970 cost $4,070. In 2011, they cost $69,282 – a price increase of 17% and a real return multiple of three times. We would guess, through anecdotal evidence, the same would be true in the UK and the same would be true for private healthcare.

So, what can an investor do? The answer is being more selective with the equities and bonds that you buy from a geographic and sector standpoint. Furthermore, we at Reyker would advocate diversifying away from the traditional asset classes of equities and bonds into other, more uncorrelated asset classes; specifically, real assets.

The term ‘real assets’ refers to assets that are frequently tangible in nature and retain their value due to their use in the real world. Examples of real assets would include property (in all its various flavours), precious metals and commodities, forestry, infrastructure and highly secure loans. Many of these assets will, by default, keep up with inflation as their income will be linked to inflation through self-adjusting income and valuations.

By way of example, Reyker has invested in the Target Healthcare REIT. This company has bought a portfolio of top of the range care homes. Their investment hypothesis is that, as we are all living longer and will be suffering with more aged-related conditions, we will need ongoing treatment for the final years of our lives. We agree with this outlook and such an investment ticks a lot of real asset and real return boxes. If healthcare costs increase rapidly, then this investment will benefit from an increased rental, operational yield and the underlying property portfolio’s capital value.

targethealthcare

An ISA portfolio is well suited to an investment in real assets. An ISA portfolio will normally represent part of a client’s balanced investment portfolio, therefore having a dedicated real asset strategy in a portion of the portfolio should provide good diversification. Furthermore, real asset investments frequently have high dividend pay outs, and therefore could provide a steady stream of tax-efficient income for clients.

The real asset universe is full of opportunities and ‘niche’ investment strategies; some are good and some should be avoided. At Reyker, we believe this area is befitting to our managed service, allowing us to sift through the investments and construct a ‘best of the breed’ portfolio.

The annual ISA allowance is £20,000 for 2017/2018. Please visit our website for more information: https://www.reyker.com/realassets/home or call our Markets & Investments team on 020 7397 2597.

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