UpFront | Published in May 2017

Can Trump’s Economic Plans Boost Real Assets in the DC Space?

By Javier Simon | May 2017

To a joint session of Congress in late February, President Donald Trump said, “The time has come for a new program of national rebuilding.” He was referring to a proposed $1 trillion spending plan to revamp America’s infrastructure—a program that would span 10 years.

If the president prevails, experts agree his policies could give a lasting boost to infrastructure assets. Many analysts say these investments have already been doing fairly well over recent years, despite heightened market volatility.

In the defined contribution (DC) space, infrastructure typically enters the picture as part of asset-allocation solutions that include alternative assets or “real” assets; examples are commodities, natural resource equities and listed real estate securities. While these asset types tend to be somewhat illiquid, increasingly, retirement plan investors are accessing them in a more liquid way through prepacked diversification solutions.

Such assets historically have performed well when stocks and bonds have underperformed, according to the report “The Benefits of Real Assets Diversified in Defined Contribution Plans” by asset manager Cohen & Steers. This tendency is attractive to investors because of widespread projections of lower returns for stocks and bonds in the coming years.

The same report indicates that, between May 1991 and December 2016, a diversified real assets blend portfolio with equally weighted portions dedicated to global real estate, commodities, natural resources and listed infrastructure would have generated a 6.9% average annualized return. The annualized total return for a typical 60/40 equity/fixed-income portfolio was 6.7%.

“If we see big infrastructure spending, that will likely accelerate the rate of inflation,” agrees Rick Unser, ERISA [Employee Retirement Income Security Act] risk management consultant with Lockton Financial Advisors. “DC plan sponsors are going to have to start thinking about how their investment menus or options respond to an inflationary environment.”

Ben Morton, senior vice president and one of the portfolio managers of Cohen & Steers’ infrastructure strategy, believes that listed infrastructure assets can offer their own downside protection. “When you look at listed infrastructure, what we’ve seen in the last several years is equity-like returns but with between 200 and 300 basis points [bps] of lower volatility than equity markets and about 50% downside capture.”

Moreover, his firm’s report says that real assets “generally exhibit a positive association with unexpected increases in inflation, compared with the generally undesirable impact of inflation surprises on stocks and bonds.”

Plan sponsors can access standalone real asset investment vehicles or multi-asset funds dedicated to real assets. Cohen & Steers found that funds in corporate DC plans on average allocate 4% to real assets, or half as much as do private defined benefit (DB) plans and a third as much as do public defined benefit plans.

“Despite the strong performance of real assets in recent years,” Unser says, “this is obviously no indication of future growth. Plan sponsors always need to understand the fundamental drivers of performance for each individual asset class in a real-asset mix, evaluate their participants’ risk profiles and determine the best proportion of their funds to devote to real assets.”