Investment Insights

Active Management in Real Assets:
The COVID-19 Response and Outlook

24 July, 2020

Over March 2020, Real Assets underperformed the wider equity market (MSCI AC Asia Pacific ex Japan Index). It was an extremely rare event when performance and volatility overshot the broader equity market; contrary to the lower volatility and lower correlation that these sectors typically show over the long term. This highlights that the sell-off was a liquidity driven event where the drawdown was indiscriminate across asset classes, markets, sectors, and stocks.

However, these sectors could be the first to recover when movement restrictions are lifted across the region and people will go shopping almost immediately, releasing the pent-up demand, and utilizing many real assets in the process. The hit to real assets may just be short term. In fact, real assets such as power grids will see minimal impact as the increase of household usage compensates for the decrease in industries.

Reducing Risks, Shoring Income

Due to the nature of this crisis, airports had to have a material reduction in earnings and significant income risks. Hence, the fund removed positions in airports. The fund also reduced positions in certain discretionary retail malls driven by tourism or high-end shoppers. Fund was repositioned towards those shopping centers which people buy groceries from.

Positions were increased in real assets which had higher income certainty such as utilities, water pipeline, telecommunications, data centers and supermarket anchored retail properties. In short, the fund was repositioned to mitigate risk and safeguard income potential. Active management is critical through this crisis. Passive investors would have to hang on to airports but the fund, being active, sold it in favor of those essentials, which better secures the income stream for investors.

CHART 1: Sector allocation of the Fund (%)

Chart 1 Source: Legg Mason Martin Currie Asia Pacific Ex Japan Real Income Fund factsheets as of 31 December 2019 and 30 June 2020. 

Selective going forward

Asia Pacific retail Real Estate Investment Trusts (REITs) have not overbuilt space, the region has strong population growth and the REITs are successfully repositioning floor space to adapt to changing market dynamics.  Going forward malls that are anchored by everyday needs and food are preferred while anticipating key area of weakness within discretionary and luxury retail sales. Within industrial properties, there is a preference for data centers, due to the increase in data usage both near term (COVID-19 restrictions requiring people to stay home) and long term, as well as the large bulk of the earnings underpinned by long-term rental agreements. The fund remains cautious towards industrial names that generate a significant portion of their earnings from non-rental services, such as development and/or funds management as we deem those earnings streams as too risky/volatile. Office properties have reduced immediate income risk due to COVID-19 but heightened medium-term tenant risk as cash-flow impacts emerge. The fund retains a positive view on the Indian office market given India’s relatively low office rents and its growing pool of affordable skilled workers. The strategy has negligible exposure to residential REITs.

Strong population growth remains the long-term driver of transport volumes upon recovery. Once restrictions ease, it is expected that toll road traffic data will be the first to improve while airport passenger recoveries will take much longer. However, the fund is aware that toll roads and airports face the brunt of patronage risk from society behavioral shifts, short-term dividend uncertainty and downside will be driven by the length of restrictions.

Utilities offer defensive qualities during current economic and environmental uncertainty. Despite all the disruptions, utilities such as gas pipelines and integrated utilities face less immediate and medium-term risk as they satisfy basic household needs and they remain extremely defensive

The bottom line

COVID-19 resulted in a breakdown in typical societal behaviors and significant uncertainty around the time needed to return to a normal world. Real assets have seen unprecedented, Global Financial Crisis-like, market falls and have been unusually one of the weakest sectors in a broad market sell-off. This has created as an opportunity at an attractive entry point. Real asset fundamentals remain strong but there are some short-term dividend risks. Real assets are being priced for a permanent reduction in income which is unlikely. Overall, we remain positive on the long-term outlook of real assets in Asia Pacific, underpinned by long-term population and urbanization growth.

IMPORTANT INFORMATION
Source: Legg Mason and Martin Currie. Data and estimates as at  30 June 2020 unless otherwise stated.
This document is for information only and does not constitute a financial promotion or other financial, professional or investment advice in any way. All data, opinions, estimates and other information are provided as of the date of this document and may be subject to change without notice. Where past performance is quoted, such figures are not indicative of future performance. This document does not constitute an offer or solicitation to buy or sell any units or shares in any fund. INVESTMENT INVOLVES RISKS. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Please refer to the most current offering documents for further details, including the risk factors.
If this document is distributed in Korea or Macau, this may not be used other than by the existing investors in Korea and distributors in Macau and Korea.
Any views expressed are opinions of the respective investment affiliates as of the date of this document and are subject to change without notice based on market and other conditions and may differ from other investment affiliates or of the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase or sell securities, and the information provided regarding such individual securities is not a sufficient basis upon which to make an investment decision.
Exchange rate changes may cause the value of overseas investments to rise or fall. Where the Fund’s base currency is not US/ HK Dollars, US/HK Dollar-based investors are exposed to exchange rate fluctuations.
Neither Legg Mason nor any officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this document or its contents. The information in this document is confidential and proprietary and may not be used other than by the intended user. This document may not be reproduced, distributed or published without prior written permission from Legg Mason.
This document has not been reviewed by the Securities and Futures Commission in Hong Kong, the Financial Services Commission in Korea and the Monetary Authority of Macao in Macau.
The fund(s) mentioned in this document is/are not registered by the Financial Supervisory Commission for offering in Korea and will not be sold in Korea prior to the registration.
Issuer: Legg Mason Asset Management Hong Kong Limited ("LMAMHK").
Korea: LMAMHK is a distributor and provider of shareholder services to the Fund.
In limited circumstances, this document may be provided upon a specific unsolicited request for information regarding the Fund.  If you are not a distributor or an existing investor in Korea and have not specifically requested this information, please disregard this document and return it to LMAMHK.
This document, provided by Legg Mason Asset Management Singapore Pte. Limited (“Legg Mason”) (Registration Number (UEN): 200007942R), is for information only and does not constitute an offer or solicitation to buy or sell any units in any fund.
The prospectus of the fund is available and may be obtained from Legg Mason or its authorised distributors. Investors should check with Legg Mason or its authorised distributors on whether a particular class of the fund is available for subscription. Investors should read the prospectus prior to any subscription.  All applications for units in the fund must be made on the application forms accompanying the prospectus.  Past performance is not necessarily indicative of future performance. All investments involve risk, including possible loss of principal. The value of the units in the fund and the income accruing to the units, if any, may fall or rise.
The funds are a sub-funds of Legg Mason Global Funds plc, an open-ended umbrella investment company constituted in Ireland.
Distribution of this document may be restricted in certain jurisdictions. Any persons coming into possession of this document should seek advice for details of, and observe such restrictions (if any). This document does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such a document or make such an offer or solicitation.  This fund is not available to US citizens, residents or greencard holders and may not be available in all jurisdictions.
Neither Legg Mason nor any officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this document or its contents. The information in this document is confidential and proprietary and may not be used other than by the intended user. This document may not be reproduced, distributed or published without prior written permission from Legg Mason.
The mention of any individual securities / funds should neither constitute nor be construed as a recommendation to purchase or sell securities, and the information provided regarding such individual securities / funds is not a sufficient basis upon which to make an investment decision. Portfolio allocations, holdings and characteristics are subject to change at any time. Although information has been obtained from sources that Legg Mason believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Legg Mason, its affiliates, officers or directors, may have an interest in the acquisition or disposal of the securities mentioned here
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore
.
The mention of any individual securities / Funds should neither constitute nor be construed as a recommendation to purchase or sell securities / Funds, and the information provided regarding such individual securities / Funds is not a sufficient basis upon which to make an investment decision. Legg Mason, Inc, its affiliates (collectively “Legg Mason Group”), officers or directors, may have an interest in the acquisition or disposal of the securities/ Funds mentioned therein.
Portfolio allocations, holdings and characteristics are subject to change at any time. Although information has been obtained from sources that Legg Mason believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Past performance is not indicative of future performance of the Fund(s).  The value of the shares in the Fund(s) and income from the Fund(s) may fall as well as rise, and is not guaranteed.  Investments are not deposits or other obligations of, nor guaranteed nor insured by, Legg Mason or their distributors, and are subject to investment risks, including the possible loss of the principal amount invested.  There is no guarantee that the Fund(s) will meet its investment objective.
The information in this document is proprietary. This document may not be reproduced, distributed or published without prior written permission from Legg Mason. Any person coming into possession of this document should seek advice for details of, and observe, such restrictions. Neither Legg Mason Group nor any officer or employee of Legg Mason Group accepts any liability whatsoever for any loss arising from any use of this document or its contents.
Taiwan Private Placement:
This document is provided by Legg Mason Investments (Taiwan) Ltd. (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: 55F-1, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R. O. C.; Telephone No.:(02) 8722-1666) (“Legg Mason”).
It contains confidential and proprietary information and is intended only for private placement investors of offshore funds in Taiwan who are qualified under Article 52 of the Regulations Governing Offshore Funds (the “Qualified Investors”).  It is delivered only to the Qualified Investors and may not be used by, copied, reproduced, relied upon or distributed in whole or in part, to any other person in Taiwan without prior written permission from Legg Mason. Qualified Investors should be aware that the fund(s) mentioned herein (the “Fund(s)”) is not registered with the Financial Supervisory Commission in Taiwan and may not be freely offered or sold in Taiwan unless it has been approved or reported for effectiveness for public offering and sale or for selling through private placement. Resale of the shares of the Fund(s) is restricted except otherwise permitted by relevant regulations. The value of the shares in the Fund(s) and income from the Fund(s) may fall as well as rise, and is not guaranteed. Investments are not deposits or other obligations of, nor guaranteed nor insured by, Legg Mason or their distributors, and are subject to investment risks, including the possible loss of the principal amount invested. There is no guarantee that the Fund(s) will meet its investment objective.
Legg Mason Investments (Taiwan) Limited is operated and managed independently.
Taiwan OBU/OSU:
This document, provided by Legg Mason Asset Management Hong Kong Limited, is intended for distribution of shares or units of a fund through Offshore Banking Unit (“OBU”)/ Offshore Security Unit (“OSU”) in Taiwan to qualified offshore investors only (as permitted under the Taiwan Offshore Banking Act and corresponding regulations). Legg Mason is authorised to distribute the funds as the appointed distributor and is not licensed or registered in Taiwan. Legg Mason Investments (Taiwan) Limited is approved by the Taiwan Financial Supervisory Commission (FSC) as the appointed Local Service Agent of Legg Mason in relation to OBU/OSU services. This document is for information only and does not constitute a recommendation, offer or invitation to purchase any shares or units in any fund. IT IS INTENDED FOR TAIWAN OBU/OSU’s INTENDED USE ONLY. It is not intended for, nor should it be distributed to, any member of the public in Taiwan.
The document has not been reviewed by the Securities and Futures Commission in Hong Kong.