Jens
Welcome to the Van Lanschot Kempen podcast ‘Allocating to real assets: art or science?’. Firstly, a statement before we start: I would like to point out that this podcast is made for professional investors and for information purposes only. It provides insufficient information for an investment decision and does not contain investment advice. The value of investments and the income from investments can fall as well as rise and are not guaranteed. Investors may not receive the amount originally invested.

Now, I would like to welcome Peter Heijboer, Head of Investment Strategy and Research. My name is Jens Poepjes, and I'm the moderator for this podcast.

Pieter
Thank you for the invite. it is a pleasure to be here.

Jens
Happy to have you here. So let's immediately dive into this podcast. Let's start by unravelling the ‘what’ and ‘why’ behind alternative investments, and specifically also real assets.

What are alternative assets and real assets, and why do we invest in them?

Pieter 
Good questions Jens. I would say alternative assets are all investments other than traditional investments such as bonds and shares. These can be liquid and illiquid, they can be tangible and intangible, and range from houses to very esoteric assets like art or whisky. Alternatives have continued to move into the mainstream over the last few years. The alternatives landscape has, I would say, a few larger building blocks - such as alternative credit, private equity and real assets. Real assets is, of course,  our topic for today.

Real Assets are tangible physical assets that possess intrinsic value from the utility function. Namely infrastructure; bridges or electricity grids, real estate; housing or logistics buildings, and farmland; annual crops or permanent crops.

Jens 
So you can touch what you're investing in, correct?

Pieter 
Yes, and to invest in alternative assets, you would mainly think of the following objectives: enhancing returns compared to traditional assets, improving the diversification in your portfolio and the possibility to embed sustainability in your investments.

Jens 
Okay, so these are the reasons why you would invest into alternative assets. That's clear. Thank you. Now specifically real assets, why would I invest in them and what makes them unique? 

Pieter 
Yeah, so there are a few distinctive characteristics of real assets compared to financial assets like stocks and bonds. When you think of tangible, physical assets as I mentioned, they possess intrinsic value from the utility function.. think of bridges for instance. Another reason is that most of real assets provide some form of inflation protection and that is, of course, very helpful in the current environment where we see elevated inflation. And thirdly, I would say it has different return drivers than most financial assets have.

Jens 
Okay. Let's dive a bit deeper into the complexity of alternative assets. You mentioned the advantages. I assume that there are also challenges when investing into alternative asset classes, can you tell me a bit more about them?

Pieter 
Yeah, sure. So we see four main challenges. First is probably illiquidity, most of these assets are less liquid than your traditional investments, either because they are in a fund that is invested for the next seven years and there's no intermediate liquidity, or because there's no secondary markets where you can sell these investments.

Secondly, these alternative assets tend to be operationally slightly more complex, and this has to do with their valuation, commitments, capital goals but also intermediate cash flows.

Thirdly, there's a larger dispersion of returns within alternative assets when compared to traditional assets. Therefore, manager selection is crucial.

Fourthly, these alternative assets tend to be less regulated than traditional assets. And hence, there is less of a safety net for investors investing in alternative assets.

Jens
Okay, that's clear. Now of course we need to do something about these challenges and we hear them from the institutional investors we speak to quite often. How does VLK help institutional investors manage these challenges when investing into alternative assets?

Pieter 
So indeed, we hear about these challenges frequently and hence we have developed an alternative investment solutions proposition where we provide advice, selection and investment on behalf of clients in a wide range of alternative asset classes. This may sound a bit theoretical but I'm going to give you a few steps whereby we define the AIS Proposition.

First step is strategic advice, second is manager selection, third is structuring and implementation and fourth is monitoring and reporting.

Jens 
And how does this help investors?

Pieter 
There's a range of elements that we see that provide the added value for clients when using this AIS Proposition. Firstly, tailored strategic advice. Secondly, open ended investment solutions with a low minimum entry & transparent fees. Thirdly, best in class managers that we select for them. And fourthly, institutional quality portfolio management and reporting.

Jens 
So the added value of this service basically tries to mitigate the challenges that we discussed earlier. You mentioned reporting but you also mentioned it's an intransparent asset class - that's an interesting angle. How do you provide meaningful reports? how does VLK do that, for example for real estate funds?

Pieter 
So with the AIS proposition, we like our clients to be in full control of their investments. So we deliver transparency as much as we can through high quality reporting. This means that we also provide, for instance, look through to single buildings, collect additional information about these buildings, valuations and also describe current market situation and follow that closely.

Jens
Okay, so despite these funds being alternative, there's, I guess, not a lot of information available. We still have the single buildings within the funds available. Interesting.

Diving a bit deeper into this proposition and then specifically into this preposition and then real assets... you explained the four steps, second was manager selection, the third was structuring and implementation & the fourth being monitoring and reporting. I think these three are relatively easy to understand. The first one I'd like to dive a bit deeper into, as strategic advice is slightly more complicated - what does it entail? How do we give strategic advice to our institutional investors?

Pieter
Yeah, sure. The objective of strategic advice is to embark with a client on a journey to discover their preferences and to ensure that the ultimate solution matches their preference. topics you can think of that we discussed with clients are for instance their return objective, their risk tolerance, liquidity budgets if they want to invest through a fund or through a mandate, or which asset classes we recommend within real assets at certain points in time and within each asset class, which region, which sector or which risk style to favor. And lastly, of course, how important it is for the client to invest sustainably and our focus on impact investing within these asset classes.

Jens
Okay, this is this is still relatively high level, can you give some examples related to real assets? And when allocating to real assets, do you think it's more science or is it also art?

Pieter
That is an interesting question. Our offers describe a few elements that we look at when advising strategically. I think there's a few elements that come back across the asset class. So within real assets, we see three main asset classes - farmland, infrastructure and real estate.

And across these asset classes, they each have their risk profiles, and risk profile you could see as, for instance, core versus opportunistic. Core is lower risk investments that are generally invested in to generate income, whereas opportunistic investments are typically higher risk investments that are more invested in to provide capital growth.

Now, there's also some differences between these three asset classes. And you could think of, for instance, liquidity. In real estate, there are several open ended funds, where you can relatively easily access and get out again, whereas actually in infrastructure & farmland it is much more difficult.

Leverage, for instance, is higher in infrastructure than it tends to be in real estate and farmlands. It also comes with potentially higher returns of course. Then lastly, I would say the complexity is then supposed to be slightly higher in infrastructure. Given that there is a very wide mix of sectors within infrastructure, that each have their own metrics and specifics

Jens 
And these are the dimensions you advise clients on then within real assets... you embark on this journey on what their preferences are?

Pieter
Correct. We explore with clients what their preferences are, and how this fits in their portfolios, as well.

So is it more of an art or science? that's of course the question. I would say it's both. So it's a science in the sense that we have a lot of data and measurement that we can apply. And in that sense, we can have some feeling for the future, as well. It's also an art, of course, because preferences are also subjective, and hence, it is also a bit of an art I would say.

Jens
You mentioned sustainability earlier on. As sustainability is a whole topic currently, a lot of regulation is coming our side on sustainability and it's an important topic for the institutional investors we speak to. How do you implement sustainable investing specifically within real assets?

Pieter
Yeah, so if I come back to the three asset class that we see in real assets... for instance, we're looking at real estate, I think most people know that when investing sustainably in real estate, you probably think of investing in green defying buildings. If you think of an example of infrastructure, I think many people have solar panels on their roof, and hence investing in solar parks or wind farms can be an example of investing sustainably in infrastructure.

I would want to give more attention to farmland actually. In the future, we need to produce food for probably 10 and a half billion people globally and today we only have 8 and a half billion people in the world. So there's a huge increase in population actually, which probably requires a 75% increase in farmland production - which is a lot of course. Meanwhile, a third of our farmland is severely degraded and freshwater phosphorus & fertile soil are on the decline.

We are reaching our planetary boundaries and as investors we can invest in applying certain regenerative techniques to bring back life in the soil to solve a lot of these issues and have a strong impact. Regenerative farming focuses on things like crop diversity, avoiding monoculture less use of chemicals, avoiding erosion, adding biodiversity strips and making the ecosystem increasingly circular. This way we can make impact and generate attractive financial returns for investors.

Jens
That's interesting. I've read a bit on regenerative farming. There are a few documentaries on that side. So thanks for eluding on it. Pieter, thanks a lot for your presence today and for sharing your expertise and insights on alternative investments and specifically on real assets. And of course, also alluding a bit to the Van Lanschot Kempen services around alternative investment solutions. Any last thoughts?

Pieter
It was fun to be here. A few last thoughts, as mentioned, alternatives continue to move to the mainstream. But there are various challenges for investors and through AIS and reporting, we hope to help you manage these challenges. I believe that VLK is well placed to guide investors on their alternative journey from the beginning to the end.

Jens
Thank you, Peter, for being here. It was a pleasure to do this podcast with you. I think we touched upon some very interesting topics around alternative investments, real assets and how VLK helps investors investing into these asset classes - specifically real assets. If you found this topic interesting, please contact us or visit our website at www.vanlanschotkempen.com.