Real Assets The New Essential - A Global Alternative Asset Manager
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Real Assets The New Essential A Global Alternative Asset Manager
Real Assets — The New Essential 1
EXECUTIVE SUMMARY
The current market environment is leading investors across the globe to seek an
alternative to traditional equity and fixed income investments. Following a multi-year
decline in interest rates and recent global financial upheaval, the ability to invest for
yield has diminished and the outlook for growth has been generally subdued. With
interest rates beginning to rise and the potential for inflation looming, investors are
seeking a New Essential portfolio investment to help navigate the market cycles
that lie ahead.
Brookfield believes this pursuit of a new alternative is creating a secular shift toward increased investment in Real Assets. Importantly, we
believe that Real Assets offer a relatively unique combination of yield, stability and growth that can provide downside protection as well as
upside value creation. Over the course of Brookfield’s experience as an owner and operator of these assets and based upon an analysis of
their historical performance, Real Assets have demonstrated a proven ability to enhance overall risk-adjusted returns across market cycles.
Looking ahead, as investors recognize the benefits of Real Assets, we expect a meaningful shift in asset allocations to occur, which may rival
the historic transformation of institutional investment from fixed income to equity securities. We expect this trend to accelerate materially
over the course of the next decade, with allocations to Real Assets reaching 20% to 30% of portfolios by 2030, with some institutional
investors allocating upwards of 50% to the asset class.
Based upon recent investment trends and fundraising activity, we believe this transformation is underway and expect that it will continue to
grow as investors recognize and appreciate the attractive, long-term benefits of Real Asset investment. Within the constraints of the current
market environment and across future challenges, we believe Real Assets can generate compelling risk-adjusted returns, provide attractive
capital appreciation and deliver important diversification benefits. Accordingly, as investors move beyond the “New Normal”, we expect Real
Assets to emerge as the New Essential.
In this piece, we provide an assessment of recent investment trends as well as an overview of the attractive characteristics of Real Assets.
Following this discussion, we offer a detailed introduction to the asset class.
Potential Benefits of Investment in Real Assets
Stability Steady cash flow streams supported by regulated or contractual revenues and attractive operating margins
Income Reliable current income with long-term capital appreciation potential
Upside Potential Meaningful leverage to economic growth
Visible Growth Drivers Positive growth momentum led by significant fundamental trends
Attractive Performance Compelling absolute and relative returns
Low Volatility Attractive risk-adjusted returns
Inflation Protection Cash flows tend to increase in an inflationary environment
Investment Diversification Diversity of geography, currency and asset type
Portfolio Diversification Low correlation to traditional equity and fixed income investments
Note: An investment in Real Assets involves significant risks, including loss of the full amount invested.
For Clients Only. Not for Redistribution. | Brookfield.com
2 Real Assets — The New Essential
Part I Exhibit 2: U.S. Federal Reserve Assets on Balance Sheet
THE case for real assets as the new essential
In our view, the current market environment is presenting numerous
challenges to navigate, leading investors across the globe to seek new
alternatives to enhance overall returns while mitigating volatility and
risk.
Low bond yields
In the years since the global financial crisis of 2008 and 2009,
central banks across the globe have flooded capital markets with
liquidity, driving government and corporate bond yields to historic
lows. Accordingly, these instruments no longer provide sufficient
current income to keep pace with growing liquidity needs or liability
requirements, particularly when considering the potential for rising
inflation. Source: U.S. Federal Reserve; data as of June 30, 2013
Exhibit 1: Falling Bond Yields Inflation concerns on the rise
The prospect of rising interest rates is leading to a corresponding
increase in concern over inflation. While current levels of inflation
remain modest and do not appear to represent a near-term threat, the
potential for rising costs over the medium-term is expected to lead
investors to seek alternatives that offer a greater degree of inflation
protection.
Low growth economic environment
Although the global economy has recovered from the recent
financial crisis and pockets of growth have begun to re-emerge,
overall growth remains subdued, with few visible catalysts to
ignite a meaningful change in trend. Despite this low growth
environment, interest rates are on the rise. In such an environment,
we believe that investors will likely need to look beyond traditional
Source: U.S. Federal Reserve, Barclays; data as of June 30, 2013
equity and fixed income investments to generate attractive returns.
Tapering of central bank support on the horizon
Exhibit 3: Subdued Global Growth
Given the historically low level of nominal yields as well as recent
improvements in global economic growth, rates have begun to rise.
Importantly, this move in rates has been exacerbated by central bank
activity, as the U.S. Federal Reserve appears poised to begin tapering
asset purchases in the near term, with a full end to quantitative easing
possible in the next few years.
While the Federal Reserve’s potential tapering of accommodative
monetary policy does signal a return to more normalized growth
in the U.S., the drawdown of this meaningful support will almost
certainly lead to a further increase in Treasury rates and bond yields.
As a point of reference, both instruments witnessed a significant rise
in rates following the mere announcement of the Federal Reserve’s
intentions – in just four months’ time, from the end of April until
the beginning of September 2013, the 10-year U.S. Treasury rate Source: World Bank; data as of June 30, 2013
increased by over 120 basis points or more than 70%, while the
average yield on U.S. investment grade bonds increased by over
80 basis points, or more than 45%1.
1
U.S. Federal Reserve; Barclays
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 3
Increasing demand for assets offering stable income The Path Forward
and growth potential
As institutional investors seek to fund liabilities and navigate the
At the same time that yields have fallen and the outlook for growth has challenges of the current landscape, we believe Real Assets are
declined, demand for income-producing assets with upside potential emerging as a new alternative – one that can provide attractive
has increased. Among both institutional and retail investors, liquidity yield, stability and growth irrespective of market cycles and
needs are on the rise. For instance, the aging U.S. Baby Boomer macroeconomic volatility. Accordingly, as investors move beyond the
population is nearing retirement and is seeking a stable source of “New Normal”, we believe the stage has been set for a strategic shift
income to weather the market cycles that lie ahead. in asset allocations, with Real Assets becoming the New Essential.
Exhibit 4: Aging U.S. Population Importantly, we believe this transformation of traditional portfolio
allocation has only just begun. Over the next decade, we expect this
trend to accelerate materially, as investors come to recognize Real
Assets as a fundamental component of portfolio investment. Indeed,
we expect that by 2030, allocations to Real Assets among institutional
investors will reach 20% to 30% of total portfolio value, with some
institutions allocating upwards of 50% to the asset class.
Defining the Real Asset Investible Universe
Real Assets are often defined as physical or tangible assets that tend
to provide a “real return”, often linked to inflation. This definition
encompasses a wide range of potential investments, including real
estate, infrastructure, timberlands, agrilands, commodities, precious
metals and natural resources. Additionally, real-return financial
instruments, such as inflation-protected bonds, are often included in
Source: U.S. Census Bureau; data as of December 2012 the Real Asset conversation as well.
Based upon Brookfield’s experience as an owner and operator of Real
Additionally, many institutional investment plans that service long-
Assets, we have sought to focus our definition of the asset class in order
term liabilities are significantly underfunded, due in large part to the
to capture several key characteristics – a pure-play emphasis on long-
inability of investment returns from traditional asset allocations to
lived, hard assets that generate stable and growing cash flow streams,
keep pace with rising liability requirements. In particular, public and
provide enhanced current yield, offer protection against inflation and
private pension plans have witnessed ballooning deficits and widening
produce attractive risk-adjusted returns. Importantly, this definition
shortfalls as investment yields have fallen while liabilities have
generally does not include commodities or financial assets, which
increased. Importantly, the number of retirees serviced by these plans
tend to experience greater volatility and are more susceptible to global
continues to grow, due to the overall aging of many developed market
capital market trends.
populations as well as increasing life expectancies across the globe.
This combination of accelerating demand for benefits and decelerating
Within our narrower definition of the Real Asset investible universe,
growth in pension assets is leading to significant financial strain.
we classify assets in four major categories: Property, Infrastructure,
Timberlands and Agrilands. For a detailed description of these
Of note, recent studies of the funding status among U.S. state and
categories, please refer to Part II of this piece, entitled “An Introduction
municipal pension plans have estimated the current aggregate
to Real Assets.”
shortfall at over $2 trillion1. Interestingly, while the methodology
underlying these studies assumed investment returns on pension
assets would range from approximately 4.0% to 6.0%, U.S. states are A historical precedent for such a meaningful transformation can be
assuming much higher rates of return, in the range of 7.25 to 8.25%.1 found in the equally significant shift from fixed income to equities that
In view of the current low yield environment, such returns are not likely has occurred over the last 30 years. As recently as the early 1980s,
to be achieved through investment in traditional asset classes, which nearly 60% of assets held by U.S. institutional investors were allocated
may require these pension plan sponsors to look elsewhere for more to fixed income securities (Exhibit 5). However, challenging investment
compelling returns. trends and macroeconomic factors, including double digit inflation, led
investors to seek a higher growth alternative. Accordingly, over the
subsequent 20 years a dramatic shift in asset allocations occurred,
whereby fixed income investments fell to only 30% of portfolio value
by the year 2000.
1
C
enter for Retirement Research at Boston College and Moody’s Investors Services:
“Adjusted Pension Liability Medians for US States”, June 2013
For Clients Only. Not for Redistribution. | Brookfield.com4 Real Assets — The New Essential
Exhibit 5: Shifting Institutional Investor Asset Allocations Investors appear to be recognizing these attractive characteristics,
as demonstrated by recent trends in institutional allocations and
fundraising activity. For instance, over the last 10 years, real estate
allocations by public defined benefit pension plans have increased
from just over 3.0% of portfolio value to nearly 8.0% (Exhibit 5).
More recently, fundraising activity has demonstrated a significant
acceleration in demand for Real Assets. During the first half of 2013,
18% of the nearly $210 billion raised globally by private equity funds
was targeted towards Real Asset investments (Exhibit 6).
Exhibit 6: Recent Momentum in Real Asset Fundraising Activity
Source: Pensions and Investments; data represents average asset mix of top
1,000 U.S. public defined benefit pension plans since 1991 and average asset
mix of top 200 U.S. public defined benefit pension plans from 1984-1991; data as
of September 30 of each respective year. “Alternatives” includes private equity
and hedge fund investments.
Today, investment trends and macroeconomic factors are converging
once again to lead to another potential shift in asset allocations – this
time to Real Assets. At a time when investors are struggling to fund
long-term liability requirements, protect current wealth, participate
in a recovering economy and defend against the potential for rising Source: Bloomberg; data as of June 30, 2013
inflation, Real Assets can offer an attractive alternative. Through We believe these indicators demonstrate the potential for a long-term
a unique combination of steady current income, leverage to an trend, as awareness of and appreciation for Real Assets continues
improving economy and protection against inflation, Real Assets may to accelerate. Over the next decade, we expect Real Assets to be
provide the foundation for institutional investors to navigate current embraced by the global investment community as a compelling
and future market environments. alternative to traditional fixed income and equities and emerge as the
New Essential.
Measuring Real Asset Performance
Throughout the analysis included in this piece, the following indexes have been utilized to measure and represent the performance of Real Assets, unless
otherwise noted. Please refer to the disclosures at the end of this report for a detailed description of each index.
Property NCREIF Property Index (data availability begins in 1Q 1978) Agrilands NCREIF Farmland Index (1Q 1991)
Infrastructure Dow Jones Brookfield Global Infrastructure Stocks MSCI World Index (1Q 1978)
Composite Index (4Q 2002) Bonds Barclays Global Aggregate Bond Index (1Q 1990)
Timberlands NCREIF Timberland Index (1Q 1987)
Of note, as private investment in infrastructure has only recently begun to accelerate, a private market infrastructure performance index with a meaningful
track record does not currently exist. Accordingly, the Dow Jones Brookfield Global Infrastructure Composite Index was utilized as the chosen proxy for
the asset class. Currently comprising more than 125 companies and with a market capitalization of over $1.0 trillion1, the Dow Jones Brookfield Global
Infrastructure Composite Index includes publicly-listed infrastructure companies traded on developed market exchanges with historical data dating
back to December 31, 2002.
A key measure for inclusion in the index is that 70% of cash flows must be derived from the ownership or operation of infrastructure assets. This
is a significant differentiator from other indexes, which have a broader definition of infrastructure and are often dominated by infrastructure service
companies, such as energy utilities, construction companies and mining companies. In contrast, the Dow Jones Brookfield Global Infrastructure
Indexes focus on companies that are more likely to generate stable and predictable cash flow growth and are typically less cyclical in nature.
Additionally, to be eligible for inclusion in the Dow Jones Brookfield Infrastructure Indexes, a company must have a minimum float-adjusted market
capitalization of $500 million as well as a minimum three-month average daily trading volume of $1 million. Securities also must be domiciled in a
country with a liquid market listing.
For more information on the Dow Jones Brookfield Global Infrastructure Indexes, please visit www.djindexes.com/infrastructure.
1
As of June 30, 2013
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 5
Optimizing AN Allocation to Real Assets While investor risk preferences and return needs may vary and asset
allocations may include a more diverse set of opportunities than
In considering the optimal allocation to Real Assets, modern portfolio
those included above, the Efficient Frontier confirms our belief in the
theory can serve as a guide. Using tools such as the Efficient Frontier,
attractiveness of Real Assets and the potential for meaningful growth
it is possible to create hypothetical portfolios which contain the
from current allocation levels.
“optimal” allocation to selected asset classes. The “optimal” allocation
is defined as that which maximizes the expected return for any given The Growth Potential of Real Assets
level of risk based upon historical performance results. Combining
each of these “optimal” portfolios across the spectrum of risk and While we expect investor allocations to Real Assets to accelerate
return creates the Efficient Frontier. in coming years, the global investible asset base is expected to
grow exponentially as well. Current estimates of total global assets
It is also possible to compare Efficient Frontiers, to determine if the managed by institutional investors stands at $71 trillion, of which
addition of a certain asset class provides higher or lower potential $45 trillion is invested to meet long-term financial obligations1. We
returns for each level of risk. In doing so, the portfolio benefits of expect this long-term invested asset base to increase in size to over $70
including a certain asset class, and the optimal allocation to that asset trillion within the 2020s, producing $25 trillion in new capital flows2.
class, become increasingly clear. Should investor allocations progress as we expect over the same time
horizon, 20% to 30% of these new capital flows may be targeted
Exhibit 7 presents such an analysis, comparing the Efficient Frontier towards Real Assets, leading to nearly $10 trillion of capital seeking Real
of a portfolio containing only bonds, equities and cash with that of a Asset investment opportunities over the next 15 years.
portfolio which also includes Real Assets.
Importantly, as demand for Real Assets continues to rise, the supply
Exhibit 7: Efficient Frontier Analysis of Real Asset investment opportunities is expected to expand as well.
Global population growth and increasing urbanization around the world
are leading to rising demand for new development. When combined
with the overdue refurbishment or modernization of existing assets
in many mature markets, a significant need for capital has become
apparent. Recent estimates indicate that this need may total as much as
$55 trillion through 2030 in the infrastructure asset class alone3. Over
the same time period, an analysis of global property markets reveals
that over $15 trillion will need to be spent in order to simply maintain
existing ratios of property investment relative to Gross Domestic
Product (GDP)4. Given the current strain on government balance sheets
around the world, public financing will not be able to subsidize this
$70 trillion price tag alone, creating a significant opportunity for the
Source: U.S. Federal Reserve, Barclays, Bloomberg, NCREIF, S&P Dow Jones investment of private capital.
Indexes; data as of June 30, 2013; the “Real Asset” category is comprised
of performance results (over the duration of available data) generated by
the previously defined indexes for Property, Infrastructure, Timberlands and
Furthermore, the ability to invest in existing Real Assets is expected to
Agrilands, weighted by the investible universe of each; the “Stocks” category is increase as well. In recent years, privatization of state-owned assets
represented by the S&P 500 Total Return Index, the “Bonds” category consists of – including toll roads, airports and seaports – has accelerated, as
the Barclays U.S. Aggregate Bond Index and the “Cash” category is comprised of
the 3-month U.S. Treasury bill.
governments across the globe seek to increase liquidity. Additionally,
diversified owners of Real Assets are increasingly selling their holdings
As demonstrated above, the Efficient Frontier for the portfolio in order to become more capital and cost efficient, such as mining
containing Real Assets is “higher” than that of the more traditional companies divesting their captive railroad systems. We expect these
portfolio, indicating that returns are greater across the spectrum of trends to continue to expand in the coming years, leading to a growing
risk. For example, assuming a standard deviation of 4.5%, the portfolio opportunity to invest in existing Real Assets.
of traditional investment options generates a return of 7.5% while the
portfolio including Real Assets produces a return of 9.5%. As such, This combination of population growth, strained public finances and
the portfolio including Real Assets generated 200 basis points of increasing monetization of in-service assets provides many options
incremental return for the same level of risk. While the value of this for investment. Whether investors seek opportunities for new
incremental return varies across the risk spectrum, it remains positive development or existing assets in mature markets or emerging growth
throughout, indicating that the addition of Real Assets to a mixed- economies, the Real Asset investible universe appears poised for
asset portfolio improved overall risk-adjusted returns throughout the meaningful growth.
time period of historical performance captured by this study. 1
OECD; Climate Policy Initiative, March 2013
2
Brookfield Asset Management estimates
Additionally, the Efficient Frontier suggests that the “optimal” 3
OECD: “Strategic Transport Infrastructure Needs to 2030”
4
EPRA, World Bank, PricewaterhouseCoopers, Brookfield Asset Management
allocation to Real Assets can be found along the upward slope of the
curve, highlighted in Exhibit 7. The target allocation to Real Assets
reflected in this portion of the curve ranges from 25% to 80%.
For Clients Only. Not for Redistribution. | Brookfield.com6 Real Assets — The New Essential
Real Assets – An Attractive Investment Exhibit 9: Stability of U.S. Listed Property Cash Flow Streams
Opportunity
Our belief that Real Assets will emerge as the New Essential portfolio
investment is driven by the powerful combination of relative stability
and growth offered by the asset class. Importantly, Real Assets can
provide downside protection in a recessionary climate due to the
duration and generally predictable nature of their cash flow streams,
while also participating in the upside of a growth environment
through meaningful exposure to a recovering economy. As such,
we believe Real Assets are uniquely positioned to provide value
and enhance overall risk-adjusted returns across the current market
cycle and those that lie ahead.
Large-Scale, long-lived assets providing essential
services Source: Brookfield Investment Management research and estimates; projected
Real Assets tend to serve as the foundation for the delivery of goods Same Store NOI Growth is based on proprietary Brookfield Investment
and services that are necessary to support the global economy. As a Management research and financial analysis and is subject to change without
notice; data as of June 30, 2013 based upon first quarter 2013 earnings
result, drivers of end-user demand for these assets tend to be relatively announcements.
predictable, sustainable and inelastic.
Attractive yields with long-term capital
Stable, bond-like cash flows appreciation
Real Assets offer investors relatively steady cash flow streams,
often supported by regulated or contractual revenues and attractive The relatively steady and predictable cash flows produced by Real
operating margins. Many Real Assets are subject to long-term lease Assets support attractive current income streams. As indicated in
or concession agreements which frequently include pricing provisions Exhibit 10, the average historical income return across Real Assets has
that seek to ensure a predictable return over time. As a result, these meaningfully outpaced equities and compares favorably with bonds.
assets tend to generate consistent, stable cash-flow streams with Additionally, current Real Asset yields remain significantly higher than
lower volatility than other traditional asset classes. both traditional asset classes. These attractive income streams may
protect the value of an investment during recessionary environments
Additionally, while macroeconomic trends can affect Real Asset and can also provide an important cushion against rising interest rates.
operations, the impact tends to be relatively muted by the long-term, Furthermore, the sustainable and predictable nature of these income
contractual nature of the underlying revenue streams. Therefore, streams leads Real Assets to offer a compelling option for investors
we believe attractive cash flow growth can be achieved across with regular cash distribution requirements.
market cycles. While asset-level financial performance is not always
readily observable, the cash flow streams produced by publicly Exhibit 10: Comparative Income Returns and Current Yield
listed companies that own and operate Real Assets are provided
on a consistent basis through quarterly reporting and disclosures.
Importantly, these financial results demonstrate the relative stability
of the underlying asset cash flows over time.
Exhibit 8: Comparative Cash Flow Growth Rates of Listed Infrastructure
and Global Equities
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents average annual returns over the duration of data
available for each index.
As demonstrated in Exhibit 10, investment in Real Assets also provides
meaningful capital appreciation potential. These long-lived, hard
assets tend to increase in value over time, as replacement costs rise
Source: Brookfield Investment Management research and estimates; FactSet; and operational efficiencies are achieved, particularly for well-located
S&P Dow Jones Indexes; Merrill Lynch Global Quantitative Strategy; MSCI; IBES; assets with high barriers to entry.
Worldscope; data as of December 31, 2012 and reflects median EBITDA growth
in each respective time period.
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 7
Equity-like Upside
Agrilands
Although a significant portion of Real Asset revenue streams are • Global population growth and increasing consumption levels
subject to long-term, contractual agreements, the asset class also • Growing demand for biofuels
retains exposure to an improving economic environment. Whether • Slowing yield growth rates
it is realized in the form of improved leasing of vacant property space,
growing throughput on toll roads, rising volumes of energy demand, Compelling Absolute and Relative Returns
expanded harvesting of timber assets, or climbing food prices, Real
As evidenced in Exhibit 13, Real Assets have produced impressive
Assets reap the benefits of a strong global economy. While Real Asset
absolute and relative returns over the last 10 years, outperforming
current income protects value on the downside, operational leverage
both the global equity and global bond markets.
enhances value on the upside.
Exhibit 13: Attractive Return Profile
Exhibit 11: Average Annual Returns during Periods of Economic
Recovery
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as June 30, 2013
of June 30, 2013; represents average annual returns during periods of economic
recovery, as defined by the National Bureau of Economic Research, over the
duration of data available for each index.
Low Volatility and comparatively higher
Growth Potential risk-adjusted returns
This relative outperformance becomes even more impressive when
In addition to meaningful leverage to an improving economic climate, viewed on a risk-adjusted basis, as the volatility of Real Asset returns
fundamental trends in each underlying asset class are leading to has historically been lower than that of equities, while returns have
attractive growth momentum. While several of these trends may been greater than that of bonds. Importantly, while Real Assets tend
require a longer time horizon to materialize, we believe they provide to retain value during economic downturns and participate in value
a clear and sustainable path upon which Real Assets can continue to creation during economic upturns, performance generally lacks sharp
produce compelling income and capital appreciation. movements in either direction. When combined with the stability
Exhibit 12: Growth Drivers for Real Assets of Real Asset cash flows, the resulting risk-adjusted returns have
meaningfully surpassed those achieved by either equities or bonds.
Property
• Employment growth leading to increased leasing demand Exhibit 14: Comparison of Sharpe Ratios across Real Assets and
• Low levels of new supply Investment Alternatives
Infrastructure
• Global population growth
• Existing infrastructure in need of repair or refurbishment
• New infrastructure development in emerging markets from growing
wealth and urbanization
• Acceleration of privatization activity leading to an expanded
investible universe
• Declining availability of public capital to fund needed expenditures
Timberlands
• Recovery of U.S. housing market
• Asia’s increasing wood demand
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
• Reduced supply from Canada and Russia June 30, 2013; Sharpe Ratio based upon 10-year average annualized total returns
• Supply constraints due to conservation, development and damage and standard deviations of performance; assumes a risk-free rate of 3.0%.
caused by the Mountain Pine Beetle
• Demand for wood fiber as an alternative energy source For Clients Only. Not for Redistribution. | Brookfield.com8 Real Assets — The New Essential
The Sharpe Ratio Defined Real Assets in a Rising Interest Rate Environment
The Sharpe Ratio is a measure of return per unit of risk. The figure is Recent developments in global capital markets have led to the potential
calculated by subtracting a risk-free rate, such as the yield of the 10-year for rising long-term interest rates, which has brought to the forefront the
U.S. Treasury bond, from the rate of return achieved from an investment. question of Real Asset performance in a rising rate environment. While
This net return is then divided by the standard deviation of performance we claim no unique insight on monetary policy, our views on the matter
results. The resulting ratio indicates whether investment returns have have been shaped by our deep experience as an owner and operator of
sufficiently rewarded investors for the level of risk assumed. The higher these assets and as an active participant within global capital markets.
the Sharpe ratio, the greater the level of risk-adjusted performance.
We firmly believe that Real Assets are uniquely positioned to generate
attractive performance across various market cycles, due to their
Hedge against inflation generally stable, long-term, contractual revenue streams combined with
considerable leverage to economic growth. During periods of higher
With inflationary concerns on the rise, we believe Real Assets represent nominal interest rates (whether from higher real rates in a more positive
an attractive investment in long-lived, physical resources that tend to growth environment or from higher inflation in a low growth environment),
increase in value as land and input costs rise. Additionally, Real Asset we believe the increased revenues from these assets will more than offset
revenue streams often respond favorably to higher inflation, as shorter any potential valuation decline from rising discount rates.
term contractual revenues (i.e., one-year apartment leases) benefit
from frequent resets while longer term lease structures (i.e., 30-year In gaining an appreciation for the performance of Real Assets across
airport concessions) often include regularly scheduled rent escalations varying cycles, it is essential to understand the impact of interest rates
linked to inflation. Importantly, end-user demand tends to be relatively and inflation on each of the main value components of an investment.
inelastic and often insulated from inflation, due to the essential nature
of the goods and services provided by Real Assets. Indeed, demand First, Real Asset revenue streams are positively impacted by interest rates and
often increases during inflationary periods, particularly when rising inflation in several ways. Infrastructure and power assets tend to operate
prices are spurred by economic growth and improving levels of under regulated and contractual revenue agreements that span several
employment and consumption. As a result of these various drivers, decades. These agreements often contain either direct, explicit inflation-
Real Asset returns tend to exhibit greater correlations with inflation linked revenue increases or revenue growth formulas that are derived
than traditional investment alternatives. from interest rates and/or inflation. The revenue streams derived from
in-place commercial property leases also tend to perform favorably in
Exhibit 15: Correlation of Asset Class Returns with Inflation an inflationary environment, as lease rolls lead to higher revenues while
rising replacement costs lead to higher asset valuations.
Secondly, interest rates remain very low and fixed interest rate loans
enhance equity returns as revenues increase. The economic effect of debt
revaluations accrues to owners and can create meaningful embedded
value. Long-term, fixed rate debt with a low coupon is beneficial in a
rising interest rate and inflationary environment, due to the stable nature
of the debt service payments relative to higher revenues.
Thirdly, Real Asset expenses tend to grow more slowly than revenues. While
the revenue implications of rising interest rates and inflation tend to be
positive, the impact of expense growth is often more subdued or passed
on to end users. Additionally, Real Assets tend to require low sustaining
capital expenditures, which helps to minimize overall expense growth.
Lastly, in anticipation of interest rate increases, capitalization rates for Real
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes, U.S. Assets did not decrease as much as fixed income yields in recent years. Asset
Bureau of Labor Statistics; data as of June 30, 2013; represents the correlation
of annualized returns for Property, Timberlands, Agrilands, Bonds and Stocks
valuations are generally based upon cash-flow projections discounted at
with historical Consumer Price Index over the duration of data available for an appropriate, risk-adjusted rate of return. This discount rate is, in turn,
each index; represents correlation of quarterly returns for Infrastructure with influenced by both the level of benchmark interest rates and the level of
historical Consumer Price Index given the limited time series of data.
demand in the investment marketplace for the asset class. We expect that
as bond yields rise, Real Asset capitalization rates will lag this movement,
as they have maintained wider spreads to absorb interest rate increases.
In summary, we expect Real Assets to produce positive and consistent
performance and stable cash flows over the long term, irrespective of
interest rates movements or capital market cycles. While short-term
volatility will ebb and flow, Real Assets will remain the New Essential.
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 9
Geographic Diversification In an attempt to discern the correlation of infrastructure asset
Real Assets provide access to a global opportunity set across multiple performance excluding the impact of capital market fluctuations,
asset classes. When combined with a variety of investment vehicle an analysis was conducted utilizing a recently established private
options – detailed in the following section – we believe diversification infrastructure market data series. The Preqin Infrastructure Quarterly
of investment across geography, currency and asset class can be Index is calculated based upon cash flow transactions and Net Asset
readily achieved. This diversity can provide enhanced insulation Values as reported by over 130 individual unlisted infrastructure
against regional economic trends and cycles. partnerships. While this index dates back only to the first quarter of
2008, the five-year life span of this data series has been one of the
Portfolio Diversification most volatile periods on record. As such, the results of a correlation
analysis utilizing this data should provide a meaningful context.
Real Asset returns have historically exhibited low correlations to
traditional equity and fixed income investments. The addition of Real
Exhibit 17: Correlation of Private Market Infrastructure Data with
Assets to a mixed-asset portfolio may therefore provide important
Equities and Bonds
diversification benefits, lowering overall volatility and enhancing risk-
adjusted returns. Stocks Bonds
Exhibit 16: Correlation of Real Asset Returns with Equities and Bonds Private Market Infrastructure -0.11 -0.05
Source: MSCI, Barclays, Bloomberg, Preqin; data as of December 31, 2012;
Stocks Bonds represents correlation of quarterly returns of the Preqin Infrastructure Quarterly
Index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Property 0.23 -0.08 Bond Index (bonds) since the first quarter of 2008, which is the earliest date for
which data is available across all indexes.
Timberlands -0.05 0.15
Agrilands 0.11 -0.03
We believe the low correlations produced by this analysis are indicative
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of the relationship between infrastructure asset performance and
of June 30, 2013; represents correlation of quarterly returns for each respective that of the listed markets. Accordingly, we believe this comparison
index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Bond Index (bonds) since the first quarter of 2003. provides further support for our belief that Real Assets can provide
powerful diversification benefits for a mixed-asset portfolio.
In regards to infrastructure, it is important to note that the proxy for
infrastructure asset performance utilized throughout this paper is a How to Access the Opportunity
listed index. As private market investment in infrastructure is relatively Depending on an investor’s needs surrounding liquidity, time horizon
new, having evolved in earnest over the last 20 years, an index of and capacity to invest, there are a number of options for participating
private market asset performance with a meaningful track record does in the global Real Asset investment opportunity. While the specific
not currently exist. Accordingly, the Dow Jones Brookfield Global characteristics of these options vary meaningfully, we believe they
Infrastructure Composite Index was chosen as the most appropriate share a common ability to provide attractive current income streams
proxy for the asset class. and capital growth potential.
This listed index is currently comprised of more than 125 asset- Exhibit 18: Typical Characteristics of Real Asset Investment Options
rich infrastructure companies, with a total market capitalization Private
of over $1.0 trillion1 and historical data dating back to December Publicly Fund
Private, Unlisted Listed Exchange- Traded Invested in
31, 2002. While we believe this index provides an effective Direct Asset Managed Unlisted Fund of Mutual Traded Equity Debt
Investment Account Funds Funds Funds Funds Securities Investments
representation of the infrastructure asset class, it does reflect the Ease of
performance of publicly traded equity securities. The listed nature Invesment
of the index provides many benefits to investors, including liquidity, Liquidity
ease of investment and diversity across geography and asset type.
Governance
However, the index has also exhibited inflated correlation levels in Rights
recent years, as it has been affected by many of the same capital Investment
market trends that have influenced the equity and bond markets. Diversification
Portfolio
Diversification
STRONG LIMITED
1
As of June 30, 2013
For Clients Only. Not for Redistribution. | Brookfield.com10 Real Assets — The New Essential
These investment options are available across the universe of Real
Capitalizing on the Real Asset Investment Opportunity
Asset opportunities, with more established asset classes offering a
wider variety of investment options. While the potential benefits of Real Assets are readily observable and
the options for investment are numerous, the ability to capitalize on the
Exhibit 19: Availability of Real Asset Investment Options opportunity is more complex.
Publicly Private Fund
Private, Unlisted Exchange- Traded Invested in • As these assets tend to be large-scale, capital-intensive investments,
Direct Asset Managed Unlisted Fund of Listed Mutual Traded Equity Debt
Investment Account Funds Funds Funds Funds Securities Investments significant access to capital is typically required in order to fund
initial acquisitions as well as ongoing capital expenditures.
Property
Infrastructure
• As not all Real Assets are created equally, investment sourcing and
underwriting play a vital role in understanding the key drivers of
Timberlands
asset performance and determining asset value. Factors such as
Agrilands
asset quality, location, lease or concession structure, ownership
* Limited pure-play investment opportunities basis and growth potential must all be considered when evaluating
a potential investment.
Interestingly, when deciding among this opportunity set, it is important
to note that correlations among Real Assets are quite low, as indicated • As Real Asset operations tend to be industry-specific and often
in Exhibit 20. This suggests that the optimal asset allocation should driven by complicated regulations, operational experience is
include more than one component asset class, which can serve to necessary in order to maximize efficiency and productivity.
enhance overall portfolio returns while diversifying total portfolio risk.
• As Real Assets are generally long-lived assets often subject to long-
Exhibit 20: Correlations Among Real Asset Constituents lasting contractual agreements, a long-term, patient investment
philosophy may be needed to fully realize the value of an investment.
Property Infrastructure Timberlands Agrilands
Property 1.00 0.27 0.33 0.22 Given the complexities of Real Asset investment and operations,
Infrastructure 0.27 1.00 -0.10 0.03 specialized expertise can assist investors seeking to access the asset
Timberlands 0.33 -0.10 1.00 0.74 class and benefit from its attractive characteristics. Along every step of
Agrilands 0.22 0.03 0.74 1.00 the investment process – sourcing, underwriting, acquiring, financing,
Source: NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents operating and monetizing – a specialized asset manager with focused
correlation of quarterly returns since the first quarter of 2003, which is the Real Asset experience can help to ensure an investment’s full value
earliest date for which data is available across all indexes.
creation potential is achieved.
evolving real asset allocations
Institutional investors globally are recognizing the potential benefits of investment in Real Assets and are evaluating the options for accessing the
opportunity. Many institutions are leading the way forward, having increased their allocations to Real Assets meaningfully in recent years. As
indicated in Exhibit 21, these allocations can move swiftly, leading to significant capital flows seeking investment in Real Asset opportunities1.
Exhibit 21: Illustrative Examples of Increasing Real Asset Allocations
Example A
Canadian National Pension Plan | C$183.5 billion | As of June 30, 2013
Asset Allocation in 2000 Asset Allocation in 2013
1
he examples included herein are based on Brookfield’s internal research of certain company annual reports and have been chosen and presented to illustrate the change
T
in asset allocations of certain investors. The examples presented herein are not intended in any way to be exhaustive of the investors investing or not investing in real
assets. An investment in real assets involves significant risk, including loss of the full amount of the investment.
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 11
Example B
U.S. University Endowment | $32.7 billion | As of June 30, 2013
Asset Allocation in 1995 Asset Allocation in 2013
Example C
U.S. State Defined Benefit Pension Plan | $117.5 billion | As of April 17, 2013
Asset Allocation in 2000 Asset Allocation in 2012
Example D
Australian Superannuation Fund | A$89.0 billion | As of June 30, 2013
Asset Allocation in 2008 Asset Allocation in 2013
Source: Company annual reports
For Clients Only. Not for Redistribution. | Brookfield.com12 Real Assets — The New Essential
We expect this trend to accelerate over the next decade, as investors of yield, stability, and growth, Real Assets offer the potential to protect
come to view Real Assets as an attractive alternative to traditional investment value on the downside while maintaining exposure to the
equity and fixed income investments. The early movers profiled in upside. Indeed, based upon our own 100-year history of owning and
Exhibit 21 have set the foundation for this important shift in asset mix operating these assets, we believe they combine the most appealing
and have demonstrated the potential for Real Asset allocations to attributes of traditional equity and fixed income investments.
increase meaningfully over a relatively short period of time. Accordingly, we believe Real Assets provide a unique opportunity to
generate compelling risk-adjusted returns across market cycles.
Conclusion – Part I
The current economic environment is presenting numerous challenges Investors across the globe are recognizing the attractive, long-term
for investors to navigate. At a time when liability requirements are benefits of investment in Real Assets. As this trend continues to
increasing, the opportunity to invest for yield has been diminished accelerate, we expect institutional allocations to the asset class to
and the outlook for growth has been subdued. With rising interest grow materially over the next decade. We believe the foundation for
rates and the potential for higher inflation on the horizon, investors are this shift has been established and the investible universe is poised to
looking beyond the traditional array of investment options in search of expand to meet this rising demand. As the "New Normal" gives way to
a more attractive alternative. the market cycles that lie ahead, we believe the stage has been set for
a new alternative to emerge and for Real Assets to become the New
Amid the constraints of the current environment, we believe Real Essential.
Assets can provide the path forward. With an attractive combination
Brookfield's Real Asset Expertise
Brookfield Asset Management is a global alternative asset manager with over $175 billion in assets under management. We have over a 100-year history
of owning and operating Real Assets, including property, infrastructure, timberlands and agrilands.
On behalf of our clients and shareholders, we own and manage one of the world’s largest portfolios of Real Assets. We offer a range of public and private
investment strategies that leverage our expertise and experience in markets across the globe. Given our deep history in the ownership and operation
of Real Assets and our belief in their future growth potential, we actively invest a very substantial amount of our own capital alongside our clients and
partners, ensuring a significant alignment of interests. We are proud of our track record for success in achieving strong risk-adjusted returns across
market cycles.
Our focus is on high quality, long-lived, cash flow generating Real Assets that are well-positioned to appreciate in value over time.
Asset Class AUM1 Profile
PROPERTY $110 billion • 192 office properties comprising 101 million sq. ft.
• 174 regional malls comprising 154 million sq. ft.
Office, Retail, Residential,
• 29 million sq. ft. of office and retail development globally
Multifamily, Industrial • 20,000 owned and over 52,500 managed apartments
and Hotel • 117,000 residential lot equivalents and 54 million sq. ft. of condo density
• 7,600 hotel rooms and 146 industrial properties comprising 35 million sq. ft.
INFRASTRUCTURE $41 billion • 28 ports, 3,200 km of toll roads and 5,100 km of rail operations in Europe, South
America and Australia
Transportation,
• 193 hydro power plants on 70 river systems in North America and Brazil
Renewable Power, Energy • Nearly 950 MW of wind capacity in key North American markets
and Utilities • 1,800 MW of early stage hydro and wind developments
• Electricity and gas distribution and connections in the U.S., New Zealand, the UK and
Colombia
• 9,900 km of transmission lines in Canada, the U.S. and Chile
TIMBERLANDS $4 billion • 2.6 million2,3 acres of timberlands in North and South America
AGRILANDS $1 billion • 580,000 acres of agricultural land in Brazil, which includes sugarcane for ethanol,
soya and corn, pineapple and rubber and a premium cattle operation
1
s of June 30, 2013. Excludes Private Equity assets under management of $22 billion and Asset Management and Services, Cash and Financial Assets and Other Assets
A
of $5 billion.
2
On July 23, 2013, Brookfield sold 100% of Longview Timber for $2.65 billion. Longview Timber consists of approximately 645,000 acres of high quality timberlands in the
U.S. Pacific Northwest. Brookfield continues to invest in timberlands and believes this is an attractive asset class for institutional investors.
3
Total acres does not include management services provided on 1.3 million acres of Crown licensed timberlands in New Brunswick.
Brookfield.com | For Clients Only. Not for Redistribution.Real Assets — The New Essential 13
Part II Multi-family residential property Sector
The multi-family residential sector is comprised of multi-unit rental
An introduction to Real Assets apartments. The main performance drivers of these assets include
employment levels, the available supply of rental housing and
As previously discussed, our definition of Real Assets is focused
competition from for-sale housing. As the typical duration of a rental
upon long-lived, hard assets that generate stable and growing cash
apartment lease is only one year, this property sector tends to exhibit
flow streams. In particular, this investible universe includes Property,
greater volatility and sensitivity to macroeconomic variables. However,
Infrastructure, Timberlands and Agrilands.
this enhanced operational leverage provides numerous benefits during
an up-cycle, allowing apartment owners to capture rising cash flow
Property
levels more quickly than owners of other property types. As a result,
An essential component of the global economy, property is an multi-family residential assets tend to provide meaningful protection
established asset class encompassing commercial and residential against rising inflation as well as attractive growth potential during
real estate assets around the world. These hard assets offer investors periods of economic expansion.
relatively steady income streams, a potential hedge against
inflation, as well as leverage to economic growth. Additionally, A Note on Single-Family Housing
property markets are the largest consumer of capital in the world, Although single-family homes are long-lived hard assets, they do not tend
providing a significant opportunity for private investment. As to possess the key characteristics we utilize in defining the Real Asset
such, demand for the asset class has remained strong for many investible universe. Accordingly, we view the development of single
decades, as investors appreciate the fundamental value of property family housing as a private equity investment opportunity rather than a
ownership over the long term. Real Asset suitable for long-term institutional ownership. However, this
business does require a significant amount of private investment capital,
The total size of the global property investible universe is currently owing to strong consumer demand for home ownership in many parts
estimated at over $25 trillion1 across developed and emerging market of the world. Brookfield participates in this opportunity as a provider of
economies. Within this universe, assets can be classified among key capital through our private equity operations.
property sectors, the most significant of which include Office, Retail,
Multi-family Residential and Industrial.
Industrial Property Sector
Office Property Sector The industrial property sector is comprised of assets such as bulk
The office property sector is comprised of assets ranging from Class warehouse space, distribution centers, light manufacturing facilities
A trophy buildings in major gateway cities to single-story buildings and modular office space. Industrial assets are often located within
in suburban office parks. The key driver of demand for office space warehouse parks, where individual buildings range in size from
across the globe is job growth, particularly within professional service 25,000 to over 1 million square feet.
industries. While this creates a degree of sensitivity to macroeconomic
factors, any such volatility is partially mitigated by the long-term Demand for industrial and warehouse assets is derived primarily
nature of office leases, which range anywhere from five to thirty years. from inventory storage or the flow of goods through tenant supply
A typical office building with an average lease term of eight years chains. Growth in demand is therefore dependent upon trends in
would have only 12% to 15% of leases expiring in each year. As a result, consumer spending, manufacturing and import/export activity.
85% or more of revenue would generally be identified at least one year Additionally, as industrial assets play a key role in the distribution
in advance. This predictability, when combined with modest levels of of commercial goods, these assets tend to be located near major
annual re-leasing, leads to relatively stable cash flow streams coupled centers of transportation, including ports, airports and roadway
with upside growth potential. systems. The industrial sector is generally viewed as relatively stable
and defensive, due to the long-term nature of its lease structures.
Retail Property Sector
The retail property sector encompasses three main asset types: local Property Growth Outlook
community shopping centers, regional malls and outlet centers. The The nascent global economic recovery is leading to increased demand
performance of retail property assets is driven by retailer demand for property across the globe, driving income and occupancy growth
for space in the short term and by trends in consumer spending over and leading to enhanced levels of profitability. Additionally, property
the long term. However, property performance tends to be relatively development activity slowed considerably following the global
stable due to multi-year lease structures that often incorporate regular financial crisis due to lower demand as well as a limited availability
increases in contractual rent obligations, usually tied to inflation. As of construction financing. Importantly, new development remains
a result, retail assets produce relatively stable, long-term cash flow significantly below historical averages, as credit provision has only
streams that can often weather short-term macroeconomic noise. recently begun to improve.
1
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PRA, Monthly Statistical Bulletin, June 2013
For Clients Only. Not for Redistribution. | Brookfield.com14 Real Assets — The New Essential
Exhibit 22: Historical Aggregate U.S. Commercial Property
While the relatively stable, long-term nature of these cash flow streams
Construction Starts
can provide resiliency through economic downturns, regional mall
performance also benefits during periods of economic recovery and
growth. As consumer demand increases, regional mall occupancy levels
and rental revenues tend to rise as well. In the current environment, these
growth drivers are complemented by the expected lack of new supply of
mall space over the next five years and resilient demand from domestic
and international retailers. We believe this combination of potential
growth underpinned by sustainable revenues and cash flows provides
a solid foundation upon which regional mall assets in particular, and
property assets in general, can produce attractive performance results
across market cycles.
Source: Citigroup; data as of June 30, 2013.
Infrastructure
As demand begins to recover with the broader economy, this supply Infrastructure assets are generally long-lived, capital-intensive assets
imbalance is likely to further drive revenue and occupancy growth for that provide essential products or services. As such, infrastructure
existing property owners. Accordingly, we believe that global property assets are vital to economic development and benefit from relatively
assets, particularly top tier, well-located properties that enjoy some inelastic demand. These assets are often characterized by sustainable
form of barrier to entry, are positioned for meaningful growth in long-term cash flows, inflation-linked revenues, high barriers to
coming years. entry and high operating margins with minimal maintenance capital
requirements. Within this defined investible universe, we classify
Furthermore, the global property investible universe is poised assets into four main categories: Transportation, Renewable Power,
for attractive growth as well. While property is an established, Energy and Utilities.
stable asset class in many mature markets, economic growth and
expanding populations are expected to fuel ongoing development Transportation
activity. Additionally, aging property assets are likely to be replaced The Transportation subsector is comprised of essential infrastructure
or refurbished, leading to enhanced opportunities for investment. networks that move freight, bulk commodities and passengers,
Meanwhile, in emerging market economies, accelerating population including railroads, toll roads, seaports, bridges, tunnels and airports.
growth and urbanization are expected to drive significant growth in Transportation assets are generally privatized through concession
new property development activity. agreements, which are granted by a government body and which set
parameters for the operation of the asset, such as:
In an attempt to quantify this growth potential, an analysis of the
relationship between property markets and GDP can serve as a guide. • concession length, which is generally in the range of 10 to 99 years,
By calculating the current ratio between these two figures for each and in some cases indefinite;
major economy around the world and applying this ratio to estimates • price increase mechanisms, which are often tied to inflation; and
of 2030 GDP, a projection of growth in the global property market can • future capital expenditures required to maintain good operating
be developed. While this approach may yield conservative results, as performance.
it assumes national property markets will not grow faster than GDP,
it serves to balance the mature growth of developed economies with Given the essential nature of transportation assets, the high barriers to
the potentially more robust growth of emerging markets. Importantly, entry, and the structure of concession agreements, volumes generally
this approach indicates that global property markets may expand by grow in-line with GDP while pricing increases in-line with inflation. The
over $15 trillion through 20301, creating a significant opportunity for long-term growth potential of volumes and pricing, combined with the
investment. low operating costs for most transportation assets, results in attractive
investment opportunities.
The Benefits of Investing in Property Assets
Property assets, particularly well-located, high quality assets, typically
Renewable power
generate relatively long-term cash flow streams that offer downside
A growing subset of the Infrastructure asset class, Renewable Power
protection as well as exposure to economic growth. For example, the
represents one of the most commercially and environmentally-
regional mall property sector is characterized by lease maturities that
friendly forms of power generation. As nations across the world
usually range from five to seven years, providing a measure of protection
seek to reduce carbon emissions in a cost-effective manner,
against market cyclicality and economic challenges. In addition, regional
renewable power has become a meaningful provider of global
mall leases often contain operating cost pass-through arrangements that
electricity supply. These assets provide energy generation fueled
provide added certainty during an unsure operating environment.
by renewable resources, including water, wind, solar, geothermal
and biomass (organic materials). Among these resources, water
and wind have provided the most economically feasible sources
of renewable energy and have experienced the most significant
1
E
PRA, World Bank, PricewaterhouseCoopers, Brookfield Asset Management growth in both supply and demand in recent years.
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