EDITOR'S LETTER: Chilly prospects

It was produced by Callan Associates, featured in The Wall Street Journal and was entitled ‘Rolling the dice’. It revealed how investors confronted with lower interest rates have to take bigger risks for the same returns of two decades ago.

Admittedly, the analogy of bears and ice caps has its faults. But there is a prevailing sense currently that investors have less room to manoeuver in the face of underwhelming returns across the investable universe. According to the chart: in 1995, a 100 percent bond portfolio returned 7.5 percent. To get 7.5 percent last year, investors needed to split their assets: 12 percent bonds; 33 percent US large cap equities; 8 percent US small cap equities; 22 percent non-US equities; 12 percent private equity; and 13 percent real estate.

The standard deviation between 1995 and 2015 was 6 percent versus 17.2 percent, the implication being that investors today must assume far more risk than before for the same result.

In accordance with what PERE’s readership already knows, the increasing reliance on real estate as a surrogate for slices of institutions’ fixed-income and equities allocations makes plenty of sense. But, while we know the asset class is ever institutionalising, even we cannot deny physical assets are more inherently risky than paper government bonds.

Beyond the risks that come with asset management, capital looking to reach real estate’s promised land might feel further disappointment. As a report published last month by German fund manager Union Investment showed, options for real estate investments are shrinking and the risk of misallocating capital is rising as this new equity continues to “pour in”. Union polled 161 property professionals in Europe and 52 percent did not expect to meet their yield targets in the next three years.

And so investors subsequently are piling into higher risk/return funds – our data show $59.3 billion was raised in H1, higher than H1 2015 and the second highest H1 total since the global financial crisis. With most of that capital backing the sector’s biggest hitters (dare I say the broad-betting beta-plus guys) and not the more numerous but smaller sharp-shooters of the industry, the chances of lower-than-expected returns once more beckons. I think again of polar bears and ice caps.