Why investors should consider alternative assets - J.P. Morgan Asset Management
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Why investors should consider alternative assets


One of the most basic principles of investing is to adequately diversify your holdings. Investing in real assets — be it property, transportation or infrastructure — offers a way for investors to broaden their portfolio beyond the traditional mix of equities and fixed income.

Until now, many individual investors have found it difficult to access this sector; generally only professional investors with significant amounts of capital have been able to buy into such assets.

But J.P. Morgan Asset Management is launching a new global investment trust for this market.

JPMorgan Global Core Real Assets Ltd enables private investors to gain exposure to more than 500 real assets, from luxury apartments and office buildings to airports and wind farms.

What are real assets?

This is a broad term that can encompass a whole range of different tangible assets, from property to gold and art.

Around 80% of the new trust’s investment will be used to invest in physical real assets, such as property, infrastructure and transportation assets.

This is a global trust, focused on the developed markets, so it might include owning real estate in Washington DC; an aircraft and leasing it to a major airline operation; or a company which develops, owns and operates solar farms.

The remaining 20% of assets will be invested in publicly traded securities exposed to real asset sectors, which are expected to give the trust additional liquidity and some portfolio flexibility.

Income returns and risk mitigation

One of the main advantages for investors is that the trust offers the opportunity to diversify into markets that are typically uncorrelated with shares or bonds.

For investors these income streams should help provide some resilience in their portfolio during periods of stock market turbulence.

This is driven by the fact that the return and risk profile of real assets is often differentiated from traditional assets. The majority of returns are driven from income – for example, they may come from the rent a tenant pays for office space or the fixed rates paid for generating green energy.

For investors these income streams should help provide some resilience in their portfolio during periods of stock market turbulence, as well as having the ability to offer some inflation risk mitigation over time.

As well as focusing on generating income, those investing in this sector also hope to see capital appreciation, with the value of the assets owned increasing in value over time, although values of real assets are also subject to fluctuations.

Access to established assets

The trust has a focus on the “quality” end of the real assets sector. In other words it is buying into what we believe to be established assets which already have an established income stream.

As a result, it is aiming to deliver target returns of between 7% and 9% a year, the lion’s share of which (4% to 6% per year in the form of a target dividend yield to be paid quarterly) will come from these income streams (the target dividend yield will be 2% to 3% per year initially).

Investors should consider, however, that there is no guarantee that the trust will deliver these target returns and the investors’ capital may be at risk. Additionally, the target total return is not indicative of the future performance and does not constitute a profit forecast.

We believe this asset class makes the trust a good core holding as well as a diversification play.

The investment trust structure for real assets

An investment trust structure can be an effective way to access this sector. Assets such as property are less liquid than public market investments: for example, it can take months to sell an ordinary three-bedroom home, so it is not surprising it can take longer to sell a high-rise building or shipping port.

If investors want to get their money out, the managers aren’t forced to sell underlying assets, potentially at a disadvantageous price. Instead the shares in the trust are simply traded on the open market.

Leading the way in real assets

Although this is a new vehicle, J.P. Morgan Asset Management has a wealth of experience managing real asset funds. We are a leading alternative asset manager, having run real asset portfolios for pension funds and other institutional investors for nearly five decades.

This is one of the few trusts aimed at private investors that offers the same global scope. Many funds or investment trusts in the “real asset” sector are far more narrowly focused: for example, they may invest solely in green energy projects or residential housing in the UK.

Philip Waller, alternative assets investment specialist at J.P. Morgan Asset Management, said: “This new trust offers an opportunity for private investors to diversify their portfolio and have an exposure to a range of assets across the globe. These are investments in real physical assets, be it bricks and mortar, trains, planes or energy projects.

“As an investment house we have a successful track record of buying and managing such assets. We are now offering an investment vehicle that opens up this market for thousands of ordinary investors.”

More about investing in JPMorgan Global Core Real Assets Ltd

Risk profile

General risks relating to Global Transport Assets

An investment in the Company is subject to certain risks associated with the ownership of commercial seagoing vessels, passenger and cargo aircraft, vehicles and other Global Transport Assets and the maritime, air, rail and other sectors of the transport industry in general, including: the burdens of ownership of such assets; local, national and international economic and political conditions; the costs of fuel and raw materials used to construct such assets; developments in international trade and changes in seaborne and other transportation patterns; changes in the tourism and holiday travel market; the financial condition of charterers, lessees, pool operators, buyers and sellers of such assets; changes in interest rates and the availability of debt financing which may render the sale or refinancing of such assets difficult or impracticable; changes in environmental laws and regulations; changes in governmental rules and fiscal and monetary policies; environmental claims arising in respect of assets acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; environmental accidents, contamination or pollution; changes in applicable tax policies and rates; changes in energy and commodities prices including bunker prices; negative developments in the economy that depress global trade and transportation activity; business interruptions caused by mechanical error; exposure to emerging markets and politically unstable regions and countries; embargoes and strikes; port and canal closures; cargo and property losses or damage; accidents caused by human error; uninsured casualties; maritime vessels, aircraft, rolling stock and other transport disasters including collisions, groundings, capsizing, crashes and derailings or incidents relating to design failures of such assets; natural disasters, weather patterns, storms and climate changes; the risk of an explosion, fire or flooding; force majeure acts; political unrest or the interference of government agencies or political bodies, armed conflicts and war; acts of piracy; terrorist events; acts of God; under-insured or uninsurable losses; epidemics and widespread transmission of communicable diseases (such as the outbreak of Severe Acute Respiratory Syndrome in 2003, which was linked to air travel, the outbreak of Middle East Respiratory Syndrome in 2012 and the outbreak of Ebola in Western Africa in 2014-2015); and other factors which are beyond the reasonable control of the Company and the Company’s service providers. The nature, timing and degree of changes in conditions in the maritime, air, rail and other sectors of the transport industry are unpredictable. In addition, as recent experience has demonstrated, commercial seagoing vessels, passenger and cargo aircraft, vehicles and other transport assets are subject to long term cyclical trends that give rise to significant volatility in values in terms of charter or lease rates, profitability and, consequently, asset values. The time lag in the maritime, air and rail industries between orders and deliveries heightens this cyclicality. In addition, significant contraction in demand for imported commodities such as iron ore, coal, crude oil and manufactured goods, as a result of economic downturns or changes in government policies in certain regional markets, could depress freight and passenger rates, as well as the general demand for commercial seagoing vessels, passenger and cargo aircraft, vehicle assets. A decline in demand for, and level of consumption of, crude oil and related products, including frac sand, ethanol and other petrochemical products, could cause demand for tank vessel and tank car capacity and charter rates to decline. The future demand for carriers and related charter rates will be dependent upon continued demand for imported commodities, economic seasonal and regional changes in demand, and changes to the capacity of the world fleet. A decline in demand for commodities and finished goods transported in seagoing vessels or an increase in supply of vessels could cause a significant decline in charter rates. The supply of shipping capacity is also a function of the delivery of new vessels and the number of older vessels scrapped, in lay-up, converted to other uses, reactivated or removed from active service. Supply may also be affected by the regulation of maritime transportation and other types of governmental regulation, including that of international authorities.

Many of these factors could cause fluctuations in charter or lease hire and pooling rates or operating expenses, causing the value of Global Transport Assets to decline and negatively affect the Company’s returns. The value of Global Transport Assets may fluctuate significantly due to these factors and may be significantly diminished in the event of a sudden downward market for such assets. The returns available from Global Transport Assets depend on the amount of income earned and capital appreciation generated by the relevant underlying assets, as well as expenses incurred in connection therewith. The types of operating expenses to which the Company may be exposed and which may be subject to increase beyond current estimates include labour, repairs and maintenance costs, the costs of periodic dry-docking of vessels and insurance premiums. If the Global Transport Assets do not generate income sufficient to meet operating expenses, including amounts owed under any third party borrowings and capital expenditures, the Company’s returns will be adversely affected. In addition, the cost of complying with governmental laws and regulations and the cost and availability of third party borrowings may also affect the market value of and returns from Global Transport Assets. The Company’s returns would be adversely affected if a significant number of charterers or lessees were unable to pay their charter or lease rates or if commercial seagoing vessels, passenger and cargo aircraft, vehicles or other transport assets could not be chartered, leased or pooled on favourable terms. Certain significant fixed expenditures associated with purchasing commercial seagoing vessels, passenger and cargo aircraft, vehicles and other transport assets (such as third party borrowings, taxes and maintenance costs) may stay the same or increase even when circumstances cause a reduction in returns from such assets.

The above factors could have an adverse effect on the Company’s financial condition, results of operations and prospects, with a consequential adverse effect on the market value of the Shares.

General risks relating to Global Infrastructure Assets

An investment in the Company is subject to certain risks associated with the ownership of Global Infrastructure Assets and infrastructure-related assets in general, including: the burdens of ownership of infrastructure; local, national and international economic conditions; the supply and demand for services from and access to infrastructure; the financial condition of users and suppliers of Global Infrastructure Assets; changes in interest rates and the availability of funds which may render the purchase, sale or refinancing of Global Infrastructure Assets difficult or impracticable; changes in environmental laws and regulations, and planning laws and other governmental rules; regulators, including public utility commissioners, taking action which changes the risk and return profile of regulated sectors or individual assets; elected officials or public policy taking action which results in outcomes that are inconsistent with asset projections; nationalisation and other government enforcement actions across sectors or on individual assets; environmental claims arising in respect of infrastructure acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; changes in energy and commodities prices; property losses or damage; accidents caused by human error; natural disasters, weather patterns, storms, and climate changes; the risk of an explosion, fire or flooding; political unrest or the interference of government agencies or political bodies, armed conflicts and war; acts of piracy; terrorist events; acts of God; changes in fiscal and monetary policies; negative developments in the economy that depress travel; uninsured casualties; force majeure acts, terrorist events, under-insured or uninsurable losses; and other factors which are beyond the reasonable control of the Company and the Company’s Service Providers. The above factors could have an adverse effect on the Company’s financial condition, results of operations and prospects, with a consequential adverse effect on the market value of the Shares.

General risks relating to Global Real Estate Assets

An investment in the Company is subject to certain risks associated with the ownership of real estate and real estate-related assets and the real estate industry in general, including: the burdens of ownership of real estate and real estate-related assets; local, national and international economic and political conditions; the supply of and demand for property; the financial condition of tenants, buyers and sellers of property; changes in interest rates and the availability of debt financing which may render the sale or refinancing of real estate and real estate-related assets difficult or impracticable; changes in environmental laws and regulations; changes in planning laws, governmental rules and fiscal and monetary policies; environmental claims arising in respect of assets acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; environmental accidents, contamination or pollution; changes in applicable tax policies and rates; changes in energy and commodities prices; property losses or damage; accidents caused by human error; natural disasters, weather patterns, storms, and climate changes; the risk of an explosion, fire or flooding; force majeure acts; political unrest or the interference of government agencies or political bodies, armed conflicts and war; acts of piracy; terrorist events; acts of God; under-insured or uninsurable losses; and other factors which are beyond the reasonable control of the Company and the Company’s service providers. The nature, timing and degree of changes in real estate conditions are unpredictable. In addition, real estate and real estate-related assets are subject to long term cyclical trends that give rise to significant volatility in values. Many of these factors could cause fluctuations in occupancy rates, rent schedules or operating expenses, causing the value of the Global Real Estate Assets to which the Company is exposed to decline and negatively affect the Company’s returns. The value of the Global Real Estate Assets may fluctuate significantly due to these factors and may be significantly diminished in the event of a sudden downward market for real estate and real estate-related assets. The returns available from Global Real Estate Assets depend on the amount of income earned and capital appreciation generated by the relevant underlying properties, as well as expenses incurred in connection therewith. The types of operating expenses to which the Company may be exposed and which may be subject to increase beyond current estimates include labour, repairs and maintenance costs and insurance premiums. If real estate and real estate-related assets do not generate income sufficient to meet operating expenses, including amounts owed under any third party borrowings and capital expenditures, the Company’s returns will be adversely affected. In addition, the cost of complying with governmental laws and regulations and the cost and availability of third party borrowings may also affect the market value of and returns from Global Real Estate Assets. The Company’s returns would be adversely affected if a significant number of tenants were unable to pay their rent or if properties could not be rented on favourable terms. Certain significant fixed expenditures associated with purchasing real estate and real estate-related assets (such as third party borrowings, taxes and maintenance costs) may stay the same or increase even when circumstances cause a reduction in returns from real estate and real estate-related assets. The above factors could have an adverse effect on the Company’s financial condition, results of operations and prospects, with a consequential adverse effect on the market value of the Shares.

General risks relating to indirect exposure to Global Real Estate Assets

An investment in the Company is subject to certain risks associated with the ownership of real estate related investments other than direct Global Real Estate Assets (such as Mezzanine Investments and commercial mortgage-backed securities (see further below) through the JPMAM Platform. The performance of those investments will be linked to the value of the real estate from which they derive their inherent value. Accordingly, all of the risks which apply in respect of direct Global Real Estate Assets as described in this “Risk Factors” section of this Prospectus will, to varying degrees, impact on the value of any non-direct Global Real Estate Assets to which the Company is exposed.

Risks related to Mezzanine Investments. The Company, through its investments in the JPMAM Platform, may have exposure to Mezzanine Investments. Entities with respect to which the Company has exposure to Mezzanine Investments in the form of mezzanine loans or preferred equity securities, may be unable to pay the interest or dividends due on those Mezzanine Investments or meet the applicable repurchase schedules, on part or all of the principal amount of such Mezzanine Investments, as a result of having other creditors ranking in priority to the JPMAM Product through which the Company holds its exposure. In the event of the failure of such an entity to which the Company is exposed with respect to a Mezzanine Investment, part or all of the principal of the Mezzanine Investment could be lost. Equity securities arising from conversion rights attached to Mezzanine Investments or from the exercise of warrants received when the Mezzanine Investment was made may prove valueless or have a low value. The transfer of unlisted equity securities and quoted equity securities in the period following any flotation is often restricted and accordingly prompt realisation of such equity securities may not be possible. Although Mezzanine Investments in the form of preferred equity securities are typically senior to common stock or other equity securities, the mezzanine loans and preferred equity securities to which the Company may be exposed in connection with any Mezzanine Investments will generally be unsecured and subordinated to substantial amounts of debt, all or a significant portion of which may be secured. In addition, such loans or securities may not be protected by all of the financial covenants, such as limitations upon additional indebtedness, typically protecting such debt. Holders of Mezzanine Investments generally are not entitled to receive any payments in bankruptcy or liquidation until senior creditors are paid in full. Holders of Mezzanine Investments in the form of preferred equity securities are not entitled to payments until all creditors are paid. In addition, the remedies available to holders of Mezzanine Investments are normally limited by restrictions benefiting senior creditors. In the event any entity into which a Mezzanine Investment is made cannot provide adequate cash flow to meet debt service, the Company may be exposed to a partial or total loss of capital invested. In addition, repayment of the principal amount of a Mezzanine Investment is likely to come from the sale or refinancing of the underlying properties and/or projects with a limited amount of principal repayment from amortisation. The projected returns are based on the Relevant Manager’s assumptions concerning such factors as rental rates, market demand, the expected length of construction and lease-up period, net operating income, and capitalisation rates. The underlying Global Real Estate Assets are also subject to market risk and the inability to predict or forecast with certainty future supply and demand and exit capitalisation rates. The above factors could have an adverse effect on the Company’s financial condition, results of operations and prospects, with a consequential adverse effect on the market value of the Shares.

Important information

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met.

J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Prospectus, PRIIPs Key Information Document and any other relevant documents can be obtained free of charge from JPMorgan Funds Limited or https://am.jpmorgan.com/gb/en/asset-management/gim/per/products/jara-ipo.

This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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