Client-specific portfolio needs and objectives (i.e. total return, income, capital appreciation, inflation hedging) should drive real asset sub-sector allocations and investment selection.
Real asset investments should not be viewed in isolation but as a component of the total portfolio.
Pacing plans and other portfolio allocation tools should be used as guidelines but should not force capital deployment.
Pursue Rigorous, Risk-Oriented Due Diligence
A consistent due diligence process should be followed that focuses on identifying organizational, strategy, operational and sector-specific risks and their mitigating factors.
Rigorous quantitative analysis should be supplemented with objective qualitative assessments.
Understanding of manager underwriting, operational value-add and drivers of asset-level performance is critical to assessing prospective performance.
Focus on Alignment of Interests and Fee Efficiency
Manager behavior will follow economic incentives.
Manager incentives should align with LP incentives and the sharing of profits should reflect manager performance across the fund investments.
Investors should focus on net, risk-adjusted returns, recognizing that large gross-to-net spreads indicate higher asset-level risks.
Co-investments can be an effective way to enhance diversification, improve performance and reduce fee drag.
Maintain Flexibility to React to Changing Markets
We are not market timers, but market dislocations can occur in any cycle, in any real asset sub-sector, throughout the world.
Successful investment involves recognizing those dislocations with our clients, having the policy flexibility to pursue them, while identifying managers that can implement.
“Hunt” Instead of “Gather” for Portfolio Diversification
Portfolio diversification is important to insulate the portfolio from overly concentrated exposures, however:
We believe in hunting instead of gathering and resulting diversification should come as a result of sound investment selection.
Diversification for the sake of diversification can work contrary to portfolio objectives.
The pursuit of diversification should be subordinate to identifying attractive investments.
