Originally published October 2021.
The returns are still valid.
Looking at the global investment landscape today, there is a gaping hole where dependable fixed interest assets used to be. Successive rounds of central bank purchases have annexed much of the territory that pension, life insurance and collective investment vehicles formerly occupied. Deprived of income yield and duration, investors have pursued multiple strategies attempting to recoup what they have lost, without assuming excessive market risk.
Many have doubled down on the corporate debt of commercial and industrial companies, emboldened by the utterly remarkable interventions in these markets by the US Federal Reserve last spring. Their enthusiasm has crushed corporate credit spreads to the point where there is virtually zero compensation for default risk, notwithstanding the extent of balance sheet leverage and despite the cyclicality of some of the companies concerned.
Others have piled into securitisations of residential and commercial mortgages, real estate debt and consumer loans, judging that expansive central bank purchases of government debt will provide solid support for private sector debts also.
“Those who put their distributions in peril by engaging in heavy CapEx or corporate acquisitions are punished accordingly”
Still others have sought to replicate bond-like characteristics in the equities of dividend-paying blue-chip companies – so-called ‘bonds in drag’. Institutional investors have
made plain to the managements of these companies that payouts must not only be maintained, but must increase over time. Those who put their distributions in peril by engaging in heavy CapEx or corporate acquisitions are punished accordingly.
However, an important and obvious substitute for government fixed interest is commercial and residential real estate: not the debt securitised against the assets, but the assets themselves. While real estate investment trusts (REITs) offer an attractive route to indirect property investment, the sector is relatively small and niche. Real estate holding companies are mostly micro businesses created by individuals for tax reasons. Largely missing from the landscape are mega-cap real estate asset management companies with diversified commercial and residential property holdings.
