HOW TO PLAY IT-Canada money managers eye real assets for diversity

Thu Oct 10, 2013 12:41pm EDT

* Real estate, precious metals, energy offer portfolio diversity

* Real assets used to be inaccessible to all but wealthy

* Assets need long-term view hand

By Andrea Hopkins

TORONTO, Oct 10 (Reuters) - When Canada's big pension funds started to diversify out of stocks and bonds, they turned to real assets in a bid for better returns. But buying real estate, infrastructure and commodities isn't just for big players anymore, and Canadian asset managers are offering them to ordinary clients.

After years of putting inflation worries on the back burner because global growth is subdued and interest rates are at historic lows, money managers are rolling out more products aimed at protecting against inflation and spreading risk.

"I really believe everybody should have some access to real assets. It primarily goes back to preservation of wealth and the possibility to create wealth as well. It's got the inflation protection that other types of assets may not give you," said Steve Yuzpe, chief financial officer at private equity firm Sprott Resource Corp.

Canadian pension funds now typically hold 17 percent to 25 percent of real assets buying pipelines, farmland, energy and gold getting a return on investment that has long attracted anyone wealthy enough to be able to afford such things.

When he managed the money of wealthy families, Som Seif saw how real assets played a role in their portfolios. Now, the Canadian exchange-traded-fund (ETF) pioneer and founder of Purpose Investments wants to provide the same access to all Canadians, but at a lower cost.

"A billionaire family is always thinking about protection of wealth versus enhancing wealth. They want to grow their asset and protect the downside," said Seif, who opened five, low-fee funds including the Purpose Diversified Real Asset Fund , available as an ETF, last month.

Seif said his(?) diversified fund which invests across five main real asset categories - agriculture, base metals, precious metals, energy and real estate - is better than picking a gold ETF, a REIT, an energy ETF and the like, because Purpose's active management regularly rebalances the fund according to quantitative rules, not investor-driven emotion.

Seif also includes both physical assets like gold, silver, oil, corn, soy and cash in the fund, as well as the companies that produce such assets or manage them, like RioCan REIT , Monsanto Co, and Teck Resources Ltd .

"We are trying to think like the most intelligent pension plans think, and bring it to the market," said Seif.

Toronto-based Russell Investments Canada also entered the real asset space this year, opening the Russell Real Assets Portfolio in May. The fund, available through advisers to clients with at least C$25,000 in their account, invests in global real estate, infrastructure, a commodity index and real-return bonds.

"On the infrastructure and real estate side, with those exposures we think you get a lot less volatility than core equities. They are more defensive properties," said Greg Nott, chief investment officer at Russell.

"We're talking about bridges and airports and toll roads - the volatility around those businesses and their earnings and revenues are a lot less," he said.

Don Coxe, a portfolio adviser to BMO Asset Management, said the obvious benefit of a real asset is scarcity. The resource is not renewable. And while commodity prices are going to cycle up and down, the hunger for the underlying commodity from a country like China is not going to go away.

Funds like the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund also diversify a portfolio away from inflation-sensitive equities and bonds, he said.

"This is an asset class that will tend to give you better performance when the rest of the equity markets aren't doing so well because there is rising inflation," said Coxe.

While Sprott Asset Management has a swath of funds to get investors into real assets, Yuzpe said buying shares of Sprott Resource Corp can also do the trick, because the company invests in private companies that are often accessible only to private equity players.

"Funds in general have trouble investing in private companies...So this is a way for individual investors like you and me to invest in (a) private equity class that is typically only open to institutional investors," he said.

Yuzpe and the others agree on one thing: investing in real assets requires a long time frame and an unemotional approach. Commodity prices can swing wildly for good reason and for no reason, and investors tend to get burned by buying high and selling when everyone else does.

"I do think they need to keep a relatively long-term perspective with real assets," said Russell's Nott.

"We've had a number of years with no inflation risk, and I don't see much even for the next few years. But at some point we're going to see stronger economic growth, the market will price in some inflation concerns and that's when we'll see some of the merits of (holding real assets)."

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