Against an increasingly uncertain economic and geopolitical backdrop, private bankers are shepherding clients into commodities, infrastructure and real estate assets.
As global markets grapple with inflation, geopolitical uncertainty, and the unpredictable interest rate cycle, private banks are increasingly steering their clients toward a category of investments often seen as more stable and tangible – ‘real’ assets.
This shift is part of a broader trend of wealth managers seeking refuge from market volatility and inflation by focusing on investments in infrastructure, commodities and real estate.
For wealthy individuals and family offices, these investments offer potential for long-term returns, act as a hedge against inflation, and play a good diversifier.
According to the 2024 Aviva Investors study, 64 per cent of institutional investors globally see diversification as a primary reason for allocating to real assets.
“If you think about infrastructure, private clients historically have been under-invested in it,” says Edmund Shing, global chief investment officer at BNP Paribas Wealth Management. “It’s a relatively new part of the real asset class base, compared with commodities and real estate.”
Infrastructure investment, until recently, has been dominated by big pension funds in the US and, to some extent, Europe. “They wanted a long-term inflation hedge to go against their liabilities,” he says.
But now, that is broadening out to private clients who are under-invested in the class and have a lot of cash that can be diverted to these opportunities.
“If you look at every wealth study done by ourselves or our competitors, the answer is always the same: lots of cash, and for private bankers, that's an issue because, from a commercial standpoint, you don't make that much money,” says Mr Shing, a speaker at PWM’s upcoming Global Wealth Management Summit in November.
“From an asset allocation point of view, while our clients want to be conservative, they can be often too conservative for their own good and hold too much cash,” he believes.
In terms of infrastructure focus, clients are “very interested” in everything to do with artificial intelligence (AI), and investments in data centres are one such key example. “The problem we have with that is simply finding enough dedicated investments; there’re just not enough to go around,” he stresses.
Energy-related infrastructure, suggests Mr Shing, is a suitable alternative, bearing in mind that “electricity consumption is going up substantially”.
Electric portfolios
Global electricity demand is expected to grow 3.4 per cent annually until 2026, according to the International Energy Agency, with the data centre sector and increased use of low-emissions sources like solar, wind, and hydro seen as key instigators. The 2024 Aviva study shows environmental, social, and governance (ESG) dimensions of real assets are growing in significance. Globally, 39 per cent of institutions surveyed cited positive ESG impact as a key reason for boosting allocations, up from 28 per cent a year ago.
As demand for energy infrastructure increases, we will need power generators, upgraded transmission networks and fitting of new cables, says Mr Shing.
Other leading private banks also favour infrastructure opportunities. “We've just had this very aggressive rate hiking cycle, and that has created dislocations in parts of the market,” says Sue-Wei Wong, head of specialist investments at Citi Private Bank, focusing on the UK, Europe, and the Middle East and north Africa region.
“Now we're seeing that cycle unwind or loosen, that's going to create price action,” she believes. Miss Wong also believes private clients are under-invested in this asset class.
On the real estate side, it’s a “potential inflation hedge” in an environment where inflation is “trending down” and is “stickier”. All eyes are on infrastructure, she says. “We’re seeing quite favourable demand and supply dynamics across the US and Europe.”
Drivers for this include the development of e-commerce infrastructure. “We’ve seen a structural shift in consumer behaviour, and that’s really stabilised since the Covid-19 pandemic,” says Miss Wong. Allocations to this class will only “increase over time”.
Geopolitical risk and US/Europe relations with China have also been drivers, she adds, referencing how certain companies are relocating to Europe, the US, or south-east Asia. Nike, for example, has shifted some manufacturing outside of China.
The scarcity of land due to “urbanisation, increasing population, and restrictive planning regimes” is also a factor boosting increased interest, which has led to “growing” need to step up land use.
Getting physical
When it comes to investing in real assets, there are two main investment approaches: direct and indirect.
Direct investing involves owning the physical asset, such as real estate, a farm, or precious metals, giving investors complete control to rent, sell, or manage the asset. Indirect investing, on the other hand, offers exposure to real assets without direct ownership. This is done through financial tools like real estate investment trusts (Reits), exchange traded funds (ETFs), asset-backed securities, or equity and debt funds.
“Most high net worth families tend to favour direct investments, particularly in real estate, over funds,” says Charles-Henry Monchau, chief investment officer at Swiss-based Syz Group, which manages assets worth $27bn. “This preference for direct investing is driven by desire for greater control, and transparency, that allow families to have more influence over their investments.”
According to the 2024 UBS Global Family Office Report, 52 per cent of real estate investments by family offices are made through direct ownership. Additionally, ultra-high net- worth families, especially those with entrepreneurial backgrounds, tend to prefer direct involvement as it aligns with long-term family goals and ability to add value beyond capital contributions, according to Mr Monchau.
Another factor behind preference for direct investments is the reduced fees and costs. “Traditionally, family offices have paid the industry-standard 2 per cent management charge and 20 per cent performance fee when investing in top-tier funds,” he says.
While there are multiple avenues into real assets, the question begs whether this asset class is only viable for ultra-wealthy families.
Lower liquidity
High net worth individuals (HNWIs) are increasingly able to “hop on the ride” through real estate funds or infrastructure-focused mutual funds, which pool capital from multiple investors, according to Mr Monchau. “Indirect investing is often more feasible for HNWIs compared to direct investments, due to lower entry and exit barriers,” he says. “Direct investments typically require substantial upfront capital and have lower liquidity and flexibility.”
In commodities, direct investments would mean owning and receiving physical assets like gold bars or oil reserves, which can be costly and logistically challenging. These difficulties mean HNWIs often prefer indirect options such as commodities funds, ETFs, or commodity-linked mutual funds. “These vehicles provide exposure to commodity prices without need for physical ownership,” says Mr Monchau.
But a new emerging trend – that of tokenisation – is allowing democratised access to real assets. “By fractionalising ownership of assets through blockchain platforms such as RealT and Parvis, even smaller investors can participate in high-value markets,” suggests Mr Monchau.
“This approach lowers barriers to entry and offers higher liquidity, as tokenised assets can be traded on secondary markets more easily compared to longer lock-in periods of funds,” he explains.
This ‘democratisation’ of illiquid assets is viewed with caution by some experts. BNP Paribas’ Mr Shing gets “nervous” when he hears about creation of semi-liquid vehicles. “They tend to be semi-liquid when everything goes well; the question is, will they still be semi-liquid in times of difficulty or crisis?” he says, referencing the global financial crisis of 2009, which saw “supposedly” liquid markets shut down overnight.
Primary challenge
The illiquid nature of these assets is acknowledged by Syz Group’s Mr Monchau. “A primary challenge lies in the fact that real assets, especially infrastructure and direct real estate investments, are often less liquid than traditional equities and bonds,” he says.
It is also difficult to value these investments, leading to fluctuations due to supply and demand changes, regulatory changes or shifts in interest rates, he adds.
Despite this, real assets tend to have “distinct economic sensitivities” compared to traditional investments, which makes them “effective” for portfolio diversification. Investment in Reits, for instance, particularly in residential properties or data centres, benefits from inflation-linked rental agreements, says Mr Monchau. “This means that as inflation rises, so do rents, thus preserving and growing the income stream.”
