Real assets—infrastructure, transportation and real estate—can provide stable income, offer potential to keep pace with inflation and can diversify portfolios of traditional assets.

JPMorgan Global Core Real Assets (JARA) invests in the higher-quality end of the real asset spectrum, seeking assets with the potential to the generate stable and predictable income that makes up most of the portfolio’s return.

Opportunities in infrastructure and transportation

Some sectors tend to have more assets with this type of income profile, either because the income is from a regulated business or based on long-term contracts, or because the sectors have strong and stable growth prospects. For example, within infrastructure, utilities are typically highly regulated businesses that also enjoy stable demand through market cycles, thereby offering relatively stable returns.

Renewable energy infrastructure will continue to benefit from the investment in long-term secular growth trends of decarbonisation and electrification, which should support strong and stable growth for these assets. The energy transition theme also affects transportation assets. Energy logistics is a growing business needed to support the expanding global market for liquified natural gas (LNG), which requires specific infrastructure for shipping and storage.

Many countries are also focused on energy security, in light of both heightened geopolitical tensions and supply chain disruptions, driving further demand for investment in transportation infrastructure related to both traditional and renewable energy.

Improving macro backdrop and real estate outlook

While long-term secular trends bolster the outlook for many real assets, particularly across infrastructure and transportation, the macroeconomic backdrop may also be starting to turn positive, which is especially good news for the real estate sector.

Private real estate valuations have been adjusting to in the sharp increase in interest rates since 2022. With markets now anticipating that the Federal Reserve (Fed) and other central banks will soon begin cutting interest rates and that the US economy is headed for a soft landing, borrowing rates and underwriting rates of return (IRR) appear to have peaked in Q4 2023—and real estate valuations may be bottoming out.

JARA has also been affected by the weakness in the real estate market but the portfolio managers and the Board have taken a number of steps to bolster the portfolio.

Update on portfolio positioning

JARA is a diversified real asset portfolio, investing in roughly 1,400 high-quality mature core assets, which provide more stable income. While mostly invested in private assets across infrastructure, transportation and real estate, about 17% of the portfolio is in listed assets. The high number of individual assets helps diversify idiosyncratic and counter party risk and JARA’s global exposure can be particularly helpful for UK investors seeking to diversify geographic risk: only 2%-3% is in the UK.

In early 2023, the portfolio managers rebalanced the allocation towards infrastructure and transportation as the portfolio had become overexposed to private real estate in the US and Asia. Within real estate, the allocation to the office sector is less than a third of the private real estate exposure. Our outlook for the Asia-Pacific region is relatively stronger with stable growth and fewer interest rate-driven headwinds. We see opportunities in residential real estate, especially in Japan, where we find multifamily residential attractive due to stable demand and supply, delayed in family formation and net migration into the core market.

The portfolio managers also added a US core real estate mezzanine debt sleeve in May 2022 to help JARA continue to provide attractive income yield, given that mezzanine spreads typically trade at a premium to commercial mortgage loans and government bonds. With interest rates now expected to decline, we think mezzanine debt will continue to provide stable income due to a supply imbalance and the flexibility to adjust from floating to fixed rates.

Seeking to boost net asset value (NAV)

JARA’s net asset value (NAV) has shown resilience. Looking at historical transaction data, exit valuations for private market transactions have been largely in line with appraisal values for JARA’s investments at the time, indicating a rigorous valuation process. Indeed, JARA’s NAV has been remarkably stable vs. property UK investment trusts.

However, over the last 12 months, continued repricing in the real estate market has weighed on JARA’s NAV, despite strong performance in infrastructure and transportation. Acknowledging these headwinds, the Board has taken four specific actions to support JARA’s NAV, including:

• increasing the quarterly dividend (5% increase for the full year)
• reducing the real estate exposure and actively seeking to reduce it further
• dampening currency fluctuations by switching the private infrastructure allocation to a hedged unit class
• initiating share buybacks (over 4% of share capital repurchased to date)

JARA’s focus on high-quality real assets and stable, predictable income—combined with active management that can rebalance the portfolio in times of market stress—makes JARA a solid foundation for a real asset allocation.