By Konrad Sippel
Realising solid and regular returns is required by income-driven institutional investors and a must in a balanced investment portfolio. However, accessing such returns has become more challenging in the current investment environment.
Fixed-income securities, which would usually provide stable and reliable income streams from bond yields still offer relatively low yield levels. In this environment investors are increasingly looking to other asset classes to provide the desired payout and yield profiles. Some have found useful alternatives in index based strategies.
Tangible assets such as real estate or infrastructure projects can fulfill the liability-driven requirements of institutional investors and provide duration and inflation-sensitivity hedging through more stable yields and bond-like payout structures. Real estate specifically was in high demand in the recent months, which has been expressed in continuously rising prices. Direct investments in real estate however require a lot of capital, high capabilities and expertise. In addition, only a few investors have the means to avoid the risks of concentration through a broadly diversified real estate portfolio and such investment opportunities are not always easy to find.
In such cases investors can instead access some of the exposure of the asset class by buying equities of listed real estate companies. While still an equity investment at the core, this offers more attractive actual yields than a plain vanilla equity investment. Indices identifying these equities not only give access to a broad diversified real estate portfolio but also offer high liquidity and can be traded easily compared to direct investments.
Intelligent index rules ensure that the exposure is tilted towards the profile of an actual real estate investment and the respective yields and consequently, investors find in real estate indices means to increase their yields and enhance their portfolio.
Infrastructure is another tangible asset that can match the current yield structure requirements of institutional investors. The demand for additional global infrastructure investments reflects a growing pattern, primarily determined by demographic and economic drivers as well as political trends. As individual investors cannot build their own toll road or airport, investors have two options to access infrastructure investments in addition to direct investment: through private equity deals or in listed equity. Listed equity provides liquidity and transparency not available through other options.
Using index funds to invest in listed infrastructure adds incremental benefits such as a robust diversification. In addition to geographic diversification, infrastructure indices help diversify the type of revenue stream by seeking breadth across multiple subsectors within different types of infrastructure assets thereby improving risk characteristics.
Finally, an option for investors to enhance yields through equity investments is to focus on dividend paying stocks with a stable dividend payout history. Popular concepts focus on the track record in dividend payouts and the share of company profits distributed to investors when selecting companies. This leads to a portfolio with improved dividend yields and the selection of economically healthy and hence more stable companies.
The development of passive investments has progressed so far that they now allow not only attractive market investments but provide also solutions addressing the challenges of the current low interest environment with improved portfolio yields. At the same time, index investments help investors to keep more of the yields achieved with their portfolio due to their comparably low total costs.
Konrad Sippel is global head of business development at STOXX Limited in Frankfurt, Germany.
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