Changes to worldwide banking regulations, along with low correlations to other asset classes, have made transportation assets an investment class individuals should consider for portfolio allocations, a global fund manager has said.
According to JP Morgan global transportation group head of portfolio management Anurag Agarwal, regulation measures implemented after the global financial crisis have resulted in banks returning to being senior secured lenders, and if not, at least increasing their levels of higher reserve capital.
Agarwal pointed out the effect of regulation has seen the participation banks have had in shipping loans drop from US$86.7 billion in 2007 to US$18.3 billion in 2017. In turn, this has presented an opportunity for other investors to enter this market – one to which they previously would not have had access.
Now access to transportation assets has been opened up, Agarwal said there were significant benefits they could add to investment portfolios, one being a strong diversification element both within the sector as well as against other asset classes.
“Transportation assets offer a very nice mix of both sectors and drivers, which makes us feel like there is great optionality from a diversification point of view to build resilient portfolios that are not all correlated and that are all not exposed to the same macro or micro factors that one tends to think of when you are doing core plus investing,” he said.
In reference to other asset classes, he noted yield-orientated transportation assets from 1998 to 2017 had very low correlation of 0.1, 0, 0.1, and -0.2 with global equities, global bonds, United States equities and US bonds respectively.
Further, he said transportation assets by nature would continue to present investment opportunities in the future.
“These assets have a finite useful life of about 25 years on average. So what that tells you is that every year about 4 per cent of the world’s fleet of trains and ships and planes ages out and has to be replaced with no influence of any more growth,” he said.
“Over the next 10 years we believe there is a need for about US$4.5 trillion worth of transportation assets that will be coming on line and that means these assets will have to be financed.”