Volatility creates opportunity and demands diversity

This interview is part of an ongoing series highlighting Canada Life’s approach to investing with its partners around the world.

In the wake of recent market volatility and ongoing inflationary pressures, investors are seeking stability in uncertain times. Diversified real asset mandates could be a crucial component for investment portfolios to remain resilient and maximize returns. Complementing traditional stocks and bonds throughout the market cycle, real assets have unique economic qualities which can help reduce the impact of volatility through enhanced diversification, maximize real returns during inflationary environments, and have a demonstrated track record of strong and consistent total returns over the long-term.

“The importance of diversification, in particular during volatile market environments, can’t be emphasized enough,” says Michelle Butler, Senior Vice President and Real Assets Portfolio Specialist at Cohen & Steers, an investment manager available on the Canada Life wealth offering, with over $80 billion USD in assets under management (AUM)[1]. Cohen & Steers’ real asset multi-strategy invests in key asset classes like real estate, natural resources, infrastructure, and commodities, alongside some diversifying levers, to help manage market risks.  

Real assets expertise

Initially focused on commodities, Butler, expanded her investment specialization since joining Cohen & Steers over eleven years ago, to also cover broader real assets, including infrastructure, resource equities and energy markets— the shift aligns with her expertise and interest in the foundational elements of real assets. “Infrastructure and resource equities complement each other well,” she notes, highlighting her dedication to these areas over the past several years. The world is transitioning from an era of commodity and resource abundance to one of undersupply. Secular forces such as changing global economic conditions, supply and demand imbalances, and megatrends such as the green energy transition and the growing middle class, are resulting in inadequate availability of many natural resources, which may result in significant returns for commodities and resource producers over the next decade. Shifting to infrastructure, Butler has seen explosive growth in the asset class over the past decade. This growth isn't just due to market appreciation but also the increase in the number of securities available for investment. For example, in 2012,

the FTSE Global Core Infrastructure 50/50 Index included about 196 securities.[1] Today, that number has grown to over 250, reflecting a significant expansion in investment opportunities.  And that doesn’t include infrastructure companies that are not included in the index, which active managers can often invest in, thereby further increasing the global investment opportunity set.

“The growth in infrastructure has been truly remarkable,” notes Butler. She added, “The market has expanded in many ways, providing a broad spectrum of options for investors looking to diversify their portfolios.” A lot of this capital formation has related to privatization of infrastructure assets over the years, a strategy used to raise capital for growth. In emerging markets, this means building new infrastructure assets, while in developed markets like the US and Canada, it’s about upgrading and maintaining aging infrastructure. Butler says, “Growth has been fairly widespread within the sectors of infrastructure, with utilities seeing substantial gains, largely due to the energy transition creating new growth opportunities in renewables. The global transportation sector has also grown, while the midstream energy sector experienced consolidation several years back while working to significantly and broadly improve balance sheet strength and business fundamentals. Communications infrastructure has benefited from strong secular demand for data, driving its expansion.

Cohen & Steers has expertise and depth of investment resources in each of the real asset classes, including energy.  “Our research teams cover the entire energy value chain --upstream, midstream, and downstream-- from traditional oil and gas to nuclear and renewables. It’s unique to find that research granularity among peer managers in our industry, but as real asset specialists, we believe it’s critical to have that expertise in-house and it can set us apart,” Butler shares.

The strategy and the strategic case for investing in real assets

Looking back to the prior decade from 2010-2020 when inflation was low and interest rates were even lower, real assets held their ground but generally underperformed compared to global equities, which were soaring. However, with inflation and volatility roaring back in 2021 and 2022, portfolios with a strategic allocation to real assets remained diversified to help maintain inflation beta. Butler indicates the following three benefits real assets bring to a portfolio:

1. Inflation beta: real assets tend to outperform traditional stocks and bonds when inflation is on the rise or when inflation surprises on the upside.
2. Diversification: including real assets in your portfolio mix can help reduce overall volatility, which is crucial for maintaining a stable investment strategy. Diversification is key here.
3. Returns: Butler talks about how with real assets, you can achieve equity-like returns, depending on how you structure the portfolio. Since real assets often involve a multi-strategy approach, the potential for strong returns is there. Moreover, by managing these assets collectively and dynamically within one portfolio, you can enhance your risk-adjusted returns.

Cohen & Steers’ real asset multi-strategy invests in key asset classes like real estate, natural resources, infrastructure, and commodities, alongside some diversifying levers, to help manage market risks. “For the Canada Life customized real assets portfolio, we have a higher allocation to short-duration credit compared to Cohen & Steers’ flagship strategy, which helps to lower the overall risk profile. The goal is always to enhance risk-adjusted returns over time, which requires a nuanced approach to portfolio management. It’s about understanding the different factors and tactical levers at play that can influence performance. When it comes to inflation it’s important to note that inflation beta is embedded in the design of our portfolio, so when inflation rises and surprises to the upside, that inflation sensitivity is built-in.”

Lastly, Butler notes it’s crucial to recognize that there isn’t a one-size-fits-all “silver bullet” real asset category. Rather each provides unique portfolio benefits.  Individually, real assets have merit.  However, together, in a diversified framework, a strategic allocation in real assets can offer tremendous utility to investors who are concentrated in traditional equities and fixed income.  Cohen & Steers offers a multi-strategy solution that may effectively address the three objectives of inflation protection, diversification and long-term return potential.

Their unique approach is grounded in active management. Bottom-up fundamental analysis is combined with dynamic top-down asset allocation to further enhance potential returns. This approach allows investors to implement a well-diversified allocation to real assets through a single holding, managed by specialists with a deep understanding of the asset classes.

Reserve your place: event featuring Cohen & Steers

Don’t forget to mark your calendars for Canada Life Investment Management  upcoming Portfolio Manager Connect call featuring Cohen & Steers where our host Roxana Nache will be joined by Vince Childers, Senior Vice President and Portfolio Manager of Cohen & Steers, on Oct. 22 at 1 p.m. ET to discuss how investing in real assets can help enhance diversification, deliver attractive risk-adjusted return potential and protect during unexpected inflation. You’ll also learn more about the Canada Life Diversified Real Assets mandate, a multi-strategy real assets fund that helps diversify equity and fixed income portfolios to better navigate market ups and downs. Register now for the Canada Life™ Portfolio Manager Connect Series.

Access Cohen & Steers expertise through mutual funds and segregated funds on the Canada Life fund shelf. 

Have a question about the investment manager and their mandates?

Contact your Canada Life Wealth Wholesaling team.

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