- Real assets are a good option for investors seeking inflation protection and a positive return.
- Lazard’s Dan McGoey shared investing opportunities across three asset class verticals.
- McGoey also highlighted three standout stocks investors can buy now.
Inflation may have come in below analyst expectations in October, but Dan McGoey believes that investors should still tread with caution.
“We’re going through a return to fundamentals — we’re pretty well advanced in that, but it’s a big space and I think we’re still early days in this downturn,” said McGoey, a portfolio manager for Lazard Asset Management’s $14 billion Real Assets strategy. “We’re still early days in unwinding quantitative easing, so to say it’s over is probably premature as well.”
In the face of mounting recessionary fears and lingering market volatility, McGoey believes that now is the time for real assets to shine.
“Real assets are known because they’re sort of inherent physical assets that tend to keep pace with inflation,” he told Insider in a recent interview. “They’re often looked to for defense against inflation and a positive real return.”
Real assets are inherently lower volatility because their returns include a spread, typically around 4% to 6%, on top of the current inflation level, McGoey explained. That means that in a year where growth stocks and equity markets as a whole are outperforming, real assets will underperform in comparison. But in a year like 2022 when stocks are down, real assets can suddenly look a lot more attractive to investors.
Another advantage of holding a mix of real assets comes down to its diversification — investors receive exposure to the entire business cycle, with certain asset classes outperforming at different points. For instance, commodities tend to perform best when inflation is rising and peaking when rates are moving up, McGoey explained. On the other hand, real estate has been a relatively weak performer this year due to its inverse correlation with interest rates.
Asset allocation across three classes
Specifically, McGoey’s team focuses on three asset class verticals: commodities, infrastructure, and real estate, with a slight overweight tilt to commodities. The team also currently favors more defensive and lower volatility assets, with an average time horizon of two to three years. Year-to-date the Lazard Real Assets fund is beating 85% of its peers, down 5.7% versus its category average of a negative 12% return.
Within commodities, McGoey’s team is specifically focused on investing in areas with particularly acute pressure points, such as a lack of investment, lack of infrastructure, or lack of production to match high demand.
“The view within our group is that there has been chronic underinvestment in a lot of the key commodities that are still very necessary,” he said, citing the transition to renewable energy as an example. “You can’t flip a switch to what is still underdeveloped capacity in wind and solar.”
Factoring in the ongoing European energy crisis, McGoey expects the oil and gas industries to continue to rally. He’s also bullish on the agricultural space as inflation peaks and supply chain constraints linger.
On the infrastructure side, McGoey is particularly focused on the move towards electrification, meaning that he’s overweight electric utilities like US energy midstream companies involved in the gathering, processing, and exporting of liquified natural gas (LNG).
Electrification will also change the primary funding source for US highway infrastructure, which traditionally were financed by a gas tax but will increasingly come from tolls such as E-ZPass as the number of electric vehicles rises. Accordingly, McGoey has also increased his investments in companies that manage or operate toll booths.
Although real estate has been a weak performer this year, McGoey said that there are still good opportunities in those assets that sold off the hardest but have healthy underlying fundamentals, like strong free cash flow. But as the new economic cycle begins in the next 12 to 24 months, he’s optimistic that the asset class will be an important contributor to his portfolio’s returns.
Chronic housing underinvestment, millennial demand, and a runup in rents are a few reasons that McGoey is bullish on the residential multifamily space. Even though rents have risen, apartments can still be a more affordable option for families than buying a home that’s experienced significant appreciation over the last several years, he explained.
McGoey also finds the industrial real estate market attractive, as retail supply chains continue to require warehouse buildings located next to urban centers. “That property is becoming increasingly valuable — the demand for it because of the continued penetration of ecommerce in particular is just incessant,” he explained.
3 stocks to buy now
McGoey is particularly overweight data centers such as Equinix (EQIX), which has a strong global presence and is the “premier player” in the hybrid cloud and work-from-home movements. From an IT standpoint, the firm also has a trusted reputation for security, redundancy, and global backup, McGoey added.
On the industrial warehouse side, McGoey pointed to Prologis (PLD) as a standout name. “It’s gone from a second-class in the real estate space to now an integral part of the supply chain,” he explained. He also cited key catalysts such as the company’s global presence, top quality properties and consumer base, and its integral role as an e-commerce facilitator.
Finally, in the infrastructure space McGoey highlighted Targa Resources (TRGP) as a key midstream player. “It’s a targeted play on the US’ strength in specifically the export of LNG to fill the gap that was created by the conflict with Russia,” he explained.