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Real Assets and Real Income

Real assets, specifically real estate and infrastructure, are businesses that provide essential services that allow global economies to function. These services include housing, healthcare, logistics, electricity, water, waste collection, communications, payment processing, data storage, and high-speed internet. Because of the essential nature of these services households, corporations and municipalities continue to pay for them, even during periods of economic weakness.

Historically, investors have looked at real assets as interest-sensitives with defensive qualities and little growth potential. The chart below demonstrates that global real assets have consistently outperformed global equities over the long term.

Global Real Assets Total Returns vs. Global Equity Total Returns1

ImageGlobal Real Assets Total Returns vs. Global Equity Total Returns1" />
Source: Bloomberg LLP. 1As at August 5, 2022.
Much of the outperformance of real assets is due to the consistent dividends paid by real estate and infrastructure companies. As the chart below demonstrates, companies that have historically increased their dividend have outperformed on a total return basis with less volatility.

Risk-Adjusted Returns of the S&P 500 Index Stocks by Dividend Policy

Risk vs return, annualized, 1973 - 2021
Risk-Adjusted Returns of S&P 500 Index Stocks by Dividend Policy
Source: Ned Davis Research, December 2021.
In addition to the potential for rising dividends and distributions, real assets also pay very tax efficient income to investors. As the chart below demonstrates, in 2021 investors in the Starlight mutual funds received most of their distributions in the form of return of capital. The lower tax rate on these income streams means investors keep more of their Starlight distributions compared to dividends from preferred and common shares or even the elevated coupons from high yield bonds.
Chart - Returns of S&P 500 Index Stocks by Dividend Policy: Growth of $100
Source: Bloomberg, E&Y Tax Calculators, taxtips.ca, Starlight Capital
Notes: High Yield Bonds represented by the Horizons Active High Yield Bond ETF, Common Equity represented by the S&P/TSX Composite Index, Preferred Equity represented by BMO Laddered Preferred Share Index ETF, SCGR is the Starlight Global Real Estate Fund series F, SCGI is the Starlight Global Infrastructure Fund series F. All yields and pricing as of August 5, 2022. SCGR and SCGI tax breakdowns as of 2021.
Both the Starlight Global Real Estate Fund and the Starlight Global Infrastructure Fund yield over 5.0% annually and the distributions are paid to investors on a monthly basis. The chart below demonstrates that the high absolute yields from the Starlight funds are supported by strong dividend and distribution growth from the underlying investments.
Chart - Average Annual Returns and Volatility by Dividend Policy
Notes: Data for the year 2022 is as of July 31, 2022
Investors could choose to invest in other asset classes to generate income however, the income from some of these asset classes has deteriorated over the last 22 years. In the year 2000 investors could generate a comfortable 6.3% annualized yield by investing in AAA-rated 10-year Canadian government bonds.

Today, to generate a similar income stream out of fixed income, investors are faced with two choices:

  • Take on significantly more risk by investing in high yield or emerging market bonds; or
  • Allocate significantly more capital to fixed income
Allocating capital to riskier companies or geographies during a global slowdown at the tail end of a global pandemic seems like a poor decision. Allocating more capital to treasuries is feasible but in order to generate the same level of income as offered 20 years ago, investors would have to allocate over twice as much capital. In comparison, investors in the Starlight funds can generate the same absolute level of after-tax cash flow with significantly less capital. This strategy should result in more after-tax cash flow with a lower risk profile for investors.
Chart - Canadian After-Tax Income Comparison
Source: Bloomberg LLP, U.S. 10 year yield as of January 20, 2000 and August 5, 2022.
The current macroeconomic environment continues to be favourable for real assets. Slowing growth, low interest rates, elevated inflation and a growing demand for tax-efficient income all bode well for real asset returns. Large institutions have already significantly increased their allocations to real assets and will likely continue to do so in this environment.
“We think that institutional investors will continue a push towards 60% alternatives allocation in their portfolios—from a global estimate of 25% today.”
Bruce Flatt, CEO, Brookfield Asset Management Inc., Q3 2019 Letter to Shareholders
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Starlight Capital and the portfolio manager believe to be reasonable assumptions, neither Starlight Capital nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus or offering documents before investing.

The content of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

Starlight mutual funds, exchange traded funds, offering memorandum funds and closed-end funds are managed by Starlight Investments Capital LP (“Starlight Capital”), a wholly-owned subsidiary of Starlight Investments. Starlight, Starlight Investments, Starlight Capital and all other related Starlight logos are trademarks of Starlight Group Property Holdings Inc.
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