In the past decade or so, investors have increasingly sought out alternative assets to help diversify their conventional equity and bond portfolios and deliver reliable income streams in a world of persistently low interest rates.

It was against that backdrop that JP Morgan Global Core Real Assets Limited (JARA), a closed-ended investment company, was launched three years ago as a global multi real asset portfolio. The aim is to provide a ‘cornerstone’ allocation to a diverse mix of real holdings that can be used by investors in a similar way to core bond and equity-focused multi-asset funds.

Diversification is absolutely central to JARA’s design – and it has several dimensions. First, the fund portfolio encompasses a broad range of real asset classes, with just over 50% in real estate¹ and the balance in infrastructure and transport markets, both private and public.

Importantly, not only is there little correlation between the fortunes of these real assets against equities and bonds, but the different real asset classes tend to follow very different performance paths, with equally low correlation to each other.

Secondly, the spread is a global one across developed markets, with around 55% in North America, 15% in Europe, 27% in Asia Pacific and just 3% in the UK¹. That complements more conventional UK-focused holdings in investors’ portfolios; but as portfolio manager Philip Waller explains, it also mitigates local market volatility.

“A global spread is particularly important in the real asset market, where local market dynamics constitute one of the main drivers of risk, whether these be political, regulatory or demographic,” he says.

Thirdly, the sheer breadth of the portfolio ensures that no single holding’s fortunes significantly impact performance, with 275 real estate and over 900 infrastructure and transport assets (including almost a fifth of the portfolio in publicly funded projects) across more than 35 countries¹.

Scale needed to run a core real assets fund

That scale of diversification, of course, raises the question of how a fund of this sort can practically be built and run. This is where the scale of JPMorgan’s global resources comes into its own.

The alternative solutions team that runs JARA uses JPMorgan’s longstanding $210 billion alternatives platform, which for the past 60 years has been managing money for pension funds, insurance companies and other institutional clients with long-term perspectives and large-scale capabilities.

That means JARA is investing into private vehicles and strategies that are already well-established and highly diversified. The result, says Waller, is “a portfolio that is quite different from its real assets peers in the UK market”.

One key word in JARA’s name and mandate is ‘core’ – but what does this actually mean, given that different asset managers may define the term in significantly different ways?

“For us, core real assets are those that sit at the higher-quality end of the spectrum, so producing more than say two-thirds of total returns from very predictable income,” Waller explains. “In effect, we aim to invest in assets that generate as much as possible of their total return from highly regulated or contracted income streams.”

To achieve that, the team focuses on developed markets, and on those leading sectors within each asset class where regulatory frameworks and technologies are well established and there are high-quality counterparties operating.

So the whole focus for JARA is on producing a genuinely reliable income stream from a highly diversified cross-section of high-quality assets with low correlation to each other.

This approach has two key advantages for investors. As Waller points out, even though the real assets market is an asset class that investors hold specifically for reliability and low volatility, there can be significant variations in performance between different parts of the market from year to year.

“Each year the performance ranking for real asset classes tend to change, so our diversified ‘cornerstone’ approach that incorporates exposure to the broad range really offers much more stability and consistency than single asset class funds by themselves,” he explains.

Real assets can produce reliable income in different economic environments

Another key advantage is the capacity of the fund to weather different economic environments. JARA is still youthful, but backtesting the portfolio over the past 20 years demonstrates its resilience and outperformance versus global aggregate fixed income data in the face of both rising and falling inflation and interest rates.

Indeed, says Waller, the recent challenging backdrop of increasing inflation and interest rates on the up can actually work well for JARA because of the income inflation linkage enjoyed by many real assets.

Against that, debt is an integral element of all real asset operations and could potentially be adversely affected as interest rates rise.

However, Waller emphasises that the fund has no company-level debt, so all the leverage is at the level of each individual asset; moreover, the team has been working to fix as much of the leverage rate as possible. Overall, the portfolio’s weighted average look-through leverage stands at a relatively conservative 37%, of which more than 70% is now fixed at attractive rates¹.

In this context, one valuable adjustment that was made in early 2022 was the inclusion of an element of real estate mezzanine debt in the portfolio.

Mezzanine debt is a stable-yielding alternative with more downside protection than conventional private real estate; because most of the holding is based on floating rates, it has performed very strongly in the face of the past year’s interest rate hikes. Moreover, because it does not involve borrowing, the allocation has helped to lower the fund’s overall level of debt.

In a highly uncertain world, diversification is widely recognised as central to a secure, reliable investment strategy, particularly where income is a key requirement. JARA’s depth of resources and breadth of coverage make it a powerful contender as a core element of any well-balance portfolio.

¹ J.P. Morgan Asset Management, as at May 2023

Find out more about JPMorgan Global Core Real Assets (JARA)