Featuring:
Larry Antonatos
Portfolio Manager and Head of the Real Asset Solutions Team
Brookfield Public Securities Group
Easing interest rates, stabilizing inflation and resilient economic growth could make real assets like infrastructure and real estate attractive opportunities for new capital deployment in 2025. Gain insight into the potential of real assets with Brookfield Oaktree’s 2025 outlook, strategy and more below.
Brookfield Oaktree Wealth Solutions provides financial advisors and their clients with a variety of alternative investments, including the Brookfield Real Assets Income Fund Inc (RA), managed by Brookfield Public Securities Group. Learn more about the Fund here.
Transcript
CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association.
Today, we are joined by Larry Antonatos, Portfolio Manager and Head of the Real Asset Solutions Team with Brookfield Public Securities Group.
We're happy to have you with us today, Larry.
Larry Antonatos:
Thanks. I'm glad to be here.
CEFA:
Larry, can you discuss the characteristics of real assets and how they may benefit investors?
Larry Antonatos:
Real assets are investable assets that are physical in nature, rather than financial or intellectual. The three major types of real assets are infrastructure, real estate, and natural resources. All real assets can provide three important investment benefits, current income, long-term capital appreciation, and inflation protection. However, infrastructure, real estate, and natural resources offer these investment benefits via different business models with different drivers of supply, demand, and pricing. In general, infrastructure has low cyclicality, real estate has moderate cyclicality, and natural resources has high cyclicality. So let me discuss each in a little bit more depth.
Infrastructure value is generally derived from fees charged to provide infrastructure services, such as power, water, communication, and transportation. Infrastructure is generally a regulated industry, so it has stability of supply, demand, and pricing. The supply of infrastructure assets is frequently regulated, and many infrastructure assets are monopolies, such as the only electric utility or water utility serving a geographic area. Demand for infrastructure services is generally steady because these services are essential services, such as power, water, and communication.
A fourth area of infrastructure, transportation, which includes airports, seaports, and toll roads, is subject to traffic fluctuations and economic sensitivity. The pricing for infrastructure services is frequently regulated as well because these are essential services. And this regulated pricing is frequently tied to inflation, providing the inflation protection I mentioned earlier. Now, because supply, demand, and pricing for infrastructure all tend to be predictable, infrastructure can provide predictable cashflows and values.
Now let's shift to real estate. Real estate value is generally derived from rental income based on lease agreements for property such as apartments, industrial, office, and retail. In contrast to infrastructure, which is regulated, real estate is a free market competitive industry with many landlords and many tenants.
Supply of real estate is driven by cycles of new construction. Demand for real estate is driven by cycles of economic activity. And pricing, in this case, rental rates, is determined by the intersection of supply and demand. Because both supply and demand are cyclical, market rental rates can move up and down. However, real estate cashflows and real estate values tend to be steadier than market rental rates due to the long-term nature of leases. Most commercial property is governed by leases of five years to 10 years.
Finally, let's discuss natural resources, where value is generally derived from the spot prices of commodities, including agriculture, energy, metals, and other mined commodities. Like real estate, natural resources is a free market competitive industry. The supply of commodities is generally increasing due to technological improvements in production. Demand for commodities is generally cyclical based on economic activity. And the pricing for commodities is determined by the intersection of supply and demand. Because supply is growing over time and demand is cyclical, commodity prices tend to be quite volatile. Accordingly, natural resource cashflows and values tend to be volatile with strong returns in times of high inflation.
CEFA:
Your team manages Brookfield Real Assets Income Fund, a closed-end fund with symbol RA. What sectors do you consider for your portfolio of real asset securities?
Larry Antonatos:
Everything we invest in is real assets. We consider three main groups of real assets. First, corporate bonds of public real estate, infrastructure and natural resources companies. Due to our income-focused mandate, we generally focus on high-yield bonds rather than investment grade bonds. Second, we invest in mortgage-backed securities, both residential and commercial mortgage-backed securities. Residential mortgage-backed securities offer low correlation to corporate bonds and low correlation to equities, while commercial mortgage-backed securities offer commercial real estate exposure with a lower volatility profile than real estate equities. And third, we invest in the equity of public infrastructure and real estate companies. I note we generally avoid natural resource equity due to the high volatility that I described earlier.
CEFA:
How active are you in allocating among these sectors and what goals and/or risks are you trying to address as you modify those allocations?
Larry Antonatos:
Our asset allocation changes are driven by changes in our top-down macroeconomic views, as well as by changes in bottom-up sector valuation and sector fundamentals. The more dynamic the market, the more opportunities arise and the more active we are. Top-down views may drive decisions to increase or decrease portfolio risk, such as shifting between equities and fixed income or shifting between the more defensive infrastructure industry and the more cyclical real estate industry. Bottom-up sector valuation may drive decisions to rotate among cheaper and more expensive asset classes. Our asset allocation goal is to improve the risk-adjusted performance of the fund by increasing current income and total return while reducing downside volatility.
CEFA:
Larry, the Federal Reserve has been easing rates, the rate of inflation has improved, economic growth has been resilient but federal deficits are challenging. We have significant geopolitical tensions and a new administration taking office in the US. Where do you see the real asset markets currently and what is your outlook for 2025?
Larry Antonatos:
There's a lot to unpack there. Let me take those factors one by one. We think lower interest rates will be a tailwind for valuations of infrastructure and real estate, benefiting both equities and bonds. We think the moderate inflation you mentioned will be a tailwind for cashflows of both infrastructure, where regulated pricing is frequently tied to inflation, and for real estate where long-term leases frequently have revenue increases tied to inflation. With respect to economic growth, growth that is stronger than expected will benefit real estate through stronger demand for space. Growth that is less than expected may drive outperformance of the defensive infrastructure sector. The federal deficits will put upward pressure on interest rates, partially offsetting the impact of cuts in policy rates by the US Federal Reserve.
Geopolitical tensions are always present. And within our space, we think that these may impact oil and gas prices, as well as energy security and energy infrastructure, but should be of limited impact to most infrastructure and real estate. The new federal administration, which will come in in January, will have several impacts. First, we expect increased business confidence due to reduced regulation and lower income taxes, and this increased confidence should drive higher economic growth. Second, we expect the reduced federal spending and reduced deficits should on the margin drive lower interest rates. Third, we think a renewed focus on energy security and energy independence should benefit traditional oil and gas in the United States, as well as oil and gas pipelines in the US. And finally, the proposed tariffs create a lot of uncertainty, could be positive, could be negative.
CEFA:
Are you finding valuations to be broadly at attractive levels or does this vary across segments of the real assets market?
Larry Antonatos:
High-yield corporate bonds, which is the largest part of our portfolio, offer attractive absolute yields, but very tight spreads relative to base rates. As base rates fall, which we expect to happen as the Fed cuts rates, we would expect absolute yields to remain steady, driving spreads wider. Second, residential mortgage-backed securities and commercial mortgage-backed securities offer exposure to improving collateral value. Within residential mortgage-backed, we think home values have been strong and will continue to be strong supporting collateral value and credit quality. And in the commercial real estate market where sentiment has been very negative since the COVID pandemic, particularly for office, we think we've reached a low point in sentiment, and we think commercial real estate values will improve from here. And finally, real estate equities and infrastructure equities offer attractive value relative to the broad equity markets. So all of these spaces represent good investment opportunities.
CEFA:
How is the RA portfolio currently positioned?
Larry Antonatos:
The Brookfield Real Assets Income Fund is invested in high-yield corporate credit of approximately 60%. And within this corporate credit, we have greater exposure to infrastructure and lesser exposure to real estate and natural resources. We're invested in securitized credit of about 30%. And here, we have greater exposure to residential mortgage-backed securities, which offers great diversification to the rest of the portfolio and lesser exposure to commercial mortgage-backed securities. And finally, we have equity exposure of approximately 10%. Here again, greater exposure to infrastructure and lesser exposure to real estate.
CEFA:
Where are you seeing the best opportunities to put new capital to work?
Larry Antonatos:
In an environment of lower interest rates and accelerating growth, we think infrastructure and real estate equities offer very attractive total return potential.
CEFA:
Larry, investors may generally have limited investment exposure to real assets. How do you see an allocation to a real asset strategy like RA best positioned in an investor's diversified portfolio?
Larry Antonatos:
We generally see allocations to real estate of 5 to 15% of a total portfolio. Because real assets provide both income and capital appreciation, we see real asset allocations funded from both equity and fixed income allocations. For the RA fund, which is dominated by fixed income, it's generally funded principally from fixed income allocations.
CEFA:
Larry, thank you so much for taking the time to join us today.
Larry Antonatos:
Thank you. Appreciate the opportunity to be with you.
CEFA:
We want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.cefa.com.
Podcast recorded December 2024.
Disclosure
This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Brookfield Public Securities Group disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice, or service, nor shall any security product, investment advice or service be offered or sold in any jurisdiction in which Brookfield is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.
Investing in the Fund involves risk, including possible loss of principal invested. There can be no assurance that the Fund will achieve its investment objective.
Investing in the Fund will be subject to numerous investment risks incidental to the ownership and operation of “real assets.” These risks may cause, among other things, a reduction in income, an increase in operating costs, and an increase in costs associated with investments in real assets, which may materially affect the financial position and returns of specific investments.
The use of leverage may magnify the impact of changes in net asset value on the holders of shares of common stock. The cost of leverage could exceed the return on the securities acquired with the proceeds of the leverage, thereby diminishing returns to the holders of the common stock.
The Fund declares and pays distributions monthly from net investment income. Distributions include all distribution payments regardless of source and may include net income, capital gains and/or return of capital (ROC). The final tax status of the distributions may differ substantially, and they will be made available to shareholders after the close of each calendar year. The proportion of distributions that are treated as taxable distributions may also vary in future years.
Closed-end funds are offered through a one-time public offering, and once issued, shares of closed-end funds typically are not redeemable to the Fund. Investors looking to sell their shares must do so on the open market through a stock exchange. At the time of sale, your shares may have a market price that is above or below NAV. Shares of closed-end funds frequently trade at a market price that is below their NAV.
Brookfield Real Assets Income Fund Inc. is distributed by Foreside Fund Services, LLC. Quasar Distributors, LLC, provides filing administration for Brookfield Real Assets Income Fund Inc.