The insurer’s way to invest in real assets

Views from the TIAA General Account

How do real assets make the General Account (GA) more resilient? 

The individual asset classes in our real assets portfolio each play a slightly different role in creating resilience – which I define here as steadiness of return experience in the face of changing economic situations. 

In some portions of our real assets portfolio, the underwritten investment return is tied to long-term, contracted, inflation-linked rent or availability payments. This can create a steady income flow throughout economic cycles and is seen most often in our traditional infrastructure investments and core real estate holdings. In many cases, a regular appreciation component also creates resilience, generating a steady pool of gains that we can choose to realize through asset sales. 

Farmland and timberland investments, what we call natural capital, have similar elements of income and appreciation return and, additionally, provide critical diversification because of the underlying drivers of value in these asset classes versus the other real asset classes. 

Each part of our real asset portfolio provides a different part of the resilience story: steady income, regular appreciation and diversification. When viewed together, they provide a stable source of returns for us through economic cycles and changing geopolitical realities.

How has the GA’s real asset portfolio evolved since it began in the 1990s?

The GA became an equity holder of real estate assets in the 1990s, having been investing in commercial mortgages as far back as the 1930s. As we became more comfortable with managing the risks of direct, equity investments in commercial real estate properties, we looked for additional equity opportunities in other real assets.

Our first timberland investment was in 1998. This was driven by portfolio diversification goals, the promise of good returns and the potential to develop a business that could attract third-party capital. Roughly 10 years later we made our first investments into farmland and infrastructure to continue to grow and diversify our real asset portfolio.

After building our initial, individual portfolios in these strategies and becoming comfortable with the asset classes as long-term pieces of our portfolio, we began to build out asset management capabilities. We acquired farmland and timberland managers who could help us invest directly and a real estate manager who could help us expand our global footprint. We acquired Nuveen as the overall investment advisor where each of these affiliates are now housed and we also added new affiliates in the renewable energy space.

While the GA has been a pioneer, natural capital allocations for many other insurers are still low. How did the GA get comfortable with the asset class?

From the very beginning, we appreciated that a growing world population was creating increased demand for the food and fiber products that natural capital investments generate, and we wanted to invest in this long-term trend.

We also saw these asset classes as natural extensions of our real estate investment strategy because they could generate similar types of returns with similar types of risk profiles. For U.S. insurance companies, real estate equity and natural capital experience the same risk-based capital (RBC) charge. We also really liked the income diversification and downside protection that natural capital strategies can provided.

With so much capital directed toward energy transition and infrastructure, what advice can you share with your peers for selecting suitable investments?

First, I’d offer that no other asset class within real assets has changed as much as infrastructure over the last 10 years. It was originally thought of as an asset class that would deliver core, stable income returns from investments associated with contracted agreements. Now, it has become a highly diversified asset class with returns often tied to development risk and merchant pricing risk.

The nature of this tool in an investor’s toolbox has altered significantly. Having said that, we continue to see it as an exciting place to participate in some of the most important stories playing out today: the global shift to a low carbon economy, exploding demands for computational capacity to support our digital lifestyles, and emerging power solutions that can meet these changing demands.

As your organization determines how to participate in this space, know that there are many ways to formulate your strategy: debt or equity; local, regional or global; greenfield or brownfield; traditional energy or renewable energy. In each case though, the highest returns will be associated with real risk and the structures are often highly complex and sophisticated. So, working with a very capable investment manager who can clearly connect your organization to strategies that best fit your portfolio needs will be an important first step.

Neither Marc deBree nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.