[00:04–00:18] Jens: Welcome to the Van Lanschot Kempen podcast. Allocating to real assets, art or science. First, a statement. Before we start, I would like to point out that this podcast is made for professional

[00:18–00:35] investors and for information purposes only. It provides insufficient information for an investment decision and does not contain investment advice. The value of investments and the income from investments can fall as well as rise and are

[00:36–00:50] not guaranteed. Investors may not receive the amount originally invested. Now we have that behind us. Welcome, Pieter Heijboer, head of investment strategy and research. My name is

[00:50–01:01] Jens Poepjes and I'm your moderator for this podcast today. 

Pieter: Hi Jens, thanks for the invite. Pleasure to be here. 

Jens: Happy to have you here. So let's immediately dive into this podcast.

[01:02–01:18] Let's start by unraveling what the what and why is behind alternative investments and specifically also real assets. So what are alternative assets and real assets and why do we invest in them?

[01:19–01:32] Pieter: Yeah, good question, Jens. I would say alternative assets are all investments other than plain vanilla bonds and shares that everybody knows. These can be liquid and illiquid, they can be tangible and intangible and range from

[01:33–01:50] houses to very esoteric assets like art or whiskey. Alternatives have continued to move into the mainstream over the last years. Alternative landscape has, I would say, a few larger building blocks. You can think of alternative credit, private equity and real assets.

[01:52–02:04] Real assets, of course, is the topic for today. Real assets are tangible physical assets that possess intrinsic value from the utility function. Namely, think of infrastructure, think of bridges or electricity

[02:05–02:20] grids, real estate, housing or logistics buildings, and farmland, annual crops or permanent crops. 

Jens: So you can basically touch what you're investing in.

Pieter: Correct, yeah. And to invest in alternative assets, you would mainly think of the following

[02:21–02:37] objectives. Think of enhancing returns compared to traditional assets, improving your diversification in your portfolio, and the possibility to embed sustainability in your investments. 

Jens: Yeah, so these are the reasons why you would invest into alternative assets. Okay,

[02:38–02:53] that's clear. Thank you. You specifically mentioned real assets. Why would I invest in them? And what makes them unique, Pieter? 

Pieter: Yeah, so there's a few distinctive characteristics of real assets compared to financial assets,

[02:53–03:09] like stocks and bonds. You can think of tangible physical assets, as I mentioned, that possess intrinsic value from the utility function. Think of bridges, for instance. Another reason is that most of these assets provide some form of inflation protection.

[03:10–03:34] And that's, of course, very helpful in the current environment where we see elevated inflation. And thirdly, I would say it has different return drivers than most financial assets have. 

Jens: Okay, let's dive a bit deeper into the complexity of alternative assets. You mentioned the advantages. I assume that there are also

[03:34–03:51] challenges when investing into alternative asset classes. Can you tell me a bit more about them? 

Pieter: Yeah, sure. So we would see mostly four main challenges. First is probably illiquidity. So most of these assets are less liquid than your

[03:52–04:04] traditional investments, either because they are in a fund that is invested for the next seven years and there's no intermediate liquidity, or because there's no secondary market where you can

[04:05–04:18] sell these investments. Secondly, these alternative assets tend to be operationally slightly more complex, and that has to do with their valuation, commitments, capital calls, but also intermediate cash flows.

[04:20–04:34] Thirdly, there's a larger dispersion of returns within alternative assets when compared to traditional assets. Therefore, manager selection is crucial. And fourthly, these alternative assets tend to be less regulated than traditional assets.

[04:35–04:49] And hence, there is less of a safety net for investors investing in alternative assets. 

Jens: Okay, that's clear. Of course, we need to do something with these challenges. We see these objectives or

[04:49–05:02] these disadvantages coming back with the institutional investors we speak to a lot. How does VLK help institutional investors with managing these disadvantages when investing into

[05:03–05:18] alternative assets? 

Pieter: Yeah, so indeed, these challenges we hear frequently, and hence, we have developed this alternative investment solutions proposition, where we provide advice, selection, and investment on behalf of clients in a wide range of alternative

[05:18–05:32] asset classes. This may sound a bit theoretical, but I'm going to give you a few items, a few steps whereby we define the AIS proposition. First step is strategic advice. Second is manager selection.

[05:33–05:51] Third is structuring and implementation. And the fourth is monitoring and reporting. 

Jens: How does this help investors? 

Pieter: Yeah, so there's a range of elements that we see that provide the added value for clients when using this AIS proposition. Firstly,

[05:54–06:11] tailored strategic advice. Secondly, open-end investment solutions with a low minimum entry and transparent fees. Best-in-class managers that we select for them. And fourthly, institutional quality, portfolio management and reporting. 

Jens: Yeah, so this added value of the services,

[06:11–06:25] they basically try to mitigate the disadvantages that we see. 

Pieter: Yeah, correct. 

Jens: Okay. And you mentioned reporting, but you also mentioned it's an untransparent asset class.

[06:26–06:43] That's an interesting angle. How do you provide meaningful reports? How does VLK do that, for example, for real estate, for real estate funds? 

Pieter: Yes, so with the AIS proposition we like our clients to be in full control of their investments.

[06:44–06:58] So we deliver the transparency as much as we can through high quality reporting. This means that we also provide for instance look through to single buildings that are quite unique, collect additional information about these buildings, valuations and also

[07:00–07:11] describe current market situation and follow that closely. 

Jens: Okay, so despite these funds being alternative, there's I guess not a lot of information available. We still have the single

[07:12–07:25] buildings within the fund available. 

Pieter: Yeah, correct. 

Jens: Okay, interesting. Diving a bit deeper into this proposition and then specifically into real assets.

[07:27–07:39] So you explained the four steps, your theoretical part, being a manager selection is the second. The third was structuring and implementation. And the fourth, monitoring and reporting.

[07:40–07:55] I think these three are relatively easy to understand. The first one I'd like to dive a bit deeper into. Strategic advice, slightly more complicated. What does it entail? How do we give strategic advice to our institutional investors?

[07:56–08:11] Pieter: Yeah, sure. The objective of strategic advice is to embark with the client on a journey to discover their preferences and to ensure that the ultimate solutions matches their preference. Topics you can think of that we discuss with clients are, for instance, their return objective,

[08:12–08:26] their risk tolerance, liquidity budget, if they want to invest through a fund or through a mandate, which asset classes we recommend within real assets at certain points in time. And for instance, within that, within each asset class which region or which sector or

[08:28–08:40] which risk style to favor. And lastly but very important, is of course how important it is for the client to invest sustainably and or focus on impact investing within these asset classes.

Jens: Okay

[08:41–08:55] this is this is still relatively high level can you give some examples related to real assets and when allocating to real assets do you think it's then more science or is it also art?

[08:57–09:09] Pieter: Yeah it's an interesting question Jens. I'll first describe a few elements that we look at when advising strategically. I think there's a few elements that come back across the asset

[09:10–09:22] class. So within real assets we see three main asset classes, Farmland, infrastructure and real estate. And across these asset classes they each have their risk profiles. And risk profile,

[09:23–09:39] you could see as, for instance, core versus opportunistic. Core is lower risk investments that are generally invested in to generate income, whereas opportunistic investments are typically higher risk investments that are more invested in to provide capital growth. Now, there's also

[09:41–09:55] some differences between these three asset classes. And you could think of for instance liquidity. There is in real estate, there are several open-ended funds where you can relatively easily access and get out again whereas actually in infrastructure

[09:56–10:18] and farmland that is much more difficult. Leverage for instance is higher in infrastructure than it tends to be in real estate and farmland. It also comes with potentially higher returns of course. Then lastly I would say the complexity tends also be slightly higher in infrastructure, given that there is a very

[10:18–10:31] wide mix of sectors within infrastructure that each have their own metrics and specifics. 

Jens: And these are the dimensions you advise clients on then within Real Assets.

[10:31–10:43] You embark on this journey on where their preferences are. 

Pieter: Correct. We explore with clients what their preferences are and how that fits in their portfolios as well. So is it more an art or a science?

[10:44–10:58] 

Jens: Yes. 

Pieter: That's, of course, the question. I would say it's both. So it's a science in the sense that we have a lot of data and measurement that we can apply. And in that sense, we can have some feeling for the future as well.

[10:59–11:11] It's also an art, of course, because preferences are also individual, subjective, and hence it's also a bit of an art, I would say.

[11:12–11:29] So a mixture would be my answer. 

Jens: Interesting. You mentioned sustainability earlier on. Sustainability is a whole topic currently. A lot of regulation coming our side on sustainability.

[11:29–11:43] It's an important topic for the institutional investors we speak to. How do you implement sustainable investing specifically within real assets, Pieter? 

Pieter: Yeah, so if I come back to the three asset class that we see in real assets,

[11:44–11:58] for instance, by looking at real estate, I think most people know that when investing sustainably in real estate, you probably think of investing in greenifying buildings. If you look at it for an example in infrastructure, I think many people have solar panels on their roof

[11:58–12:11] and hence investing in solar parks or wind farms can be an example of investing sustainably in infrastructure. But I would want to give a bit more attention to farmland, actually. In the future, we need to

[12:12–12:30] produce food for probably 10.5 billion people globally. And today, we only have 8.5 billion people in the world. So that's a huge increase in population, actually, which probably requires a 75% increase in farmland production, which is a lot, of course. Meanwhile, a third of our farmland is severely degraded.

[12:34–12:54] Fresh water, phosphorus and fertile soil are on the decline. We're reaching our planetary boundaries. And as investors, we can invest in applying certain regenerative techniques to bring back life in the soil, to solve a lot of these issues and have a strong impact. Regenerative farming focuses on things like crop diversity, so avoiding monoculture, less use of chemicals, avoiding erosion,

[12:55–13:10] adding biodiversity strips and making the ecosystem increasingly circular. This way we can make impact and generate attractive financial returns for our investors. 

Jens: That's interesting. I've read a bit and saw a bit on regenerative farming.

[13:10–13:26] There are a few documentaries on that side, so thanks for alluding on it. Pieter, thanks a lot for your presence today and for sharing your expertise and insight on alternative investments and specifically on real assets.

[13:31–13:49] And of course, also alluding a bit to the Van Lanschot Kempen services around alternative investment solutions. Any last thoughts on your side? 

Pieter: Thanks, Jens. It was fun to be here. And maybe a few last thoughts. As mentioned, alternatives continue to move to the mainstream, but there are various challenges for investors. And with AIS and look through reporting, we help you manage these challenges.

[13:50–14:04] And I believe that VLK is well placed to guide investors on their alternatives journey from the beginning until the end.

Jens: Great. Thank you, Pieter, for being here. It was a pleasure to do this podcast with you. I think we touched upon some very interesting

[14:05–14:18] topics around alternative investments, real assets, and in which way VLK helps investors investing into these asset classes and specifically real assets. If you found this topic interesting,

[14:19–14:25] please contact us or visit our website at vanlanschotkempen.com.