A recent IFA Magazine webinar, in conjunction with Gravis Capital, revealed the considerable opportunities that investing in digital assets present for investors. What we used to think of as whizzy and cutting edge, has rapidly become the backbone of everyday life. Here we bring you some of the key themes and highlights from the webinar, which proved very popular with our IFA Magazine audience.
The digital age is firmly here. Anyone who has ever left their phone at home, experienced a broadband failure, awaited the urgently ordered parcel, or just wanted to access their bank account is a beneficiary and, if you like, a victim of this newfound dependence on all things connected. The so-called ‘Fourth Industrial Revolution’, in which digital technologies pervade every area of life, from how we work and play, to how we navigate day-to-day life, is well underway.
The evolution from analogue to digital has happened startlingly quickly. The technology now at our fingertips operates at a speed and sophistication that would have once fallen well beyond the reach of our imagination. Digital assets, such as data centres and telecommunication towers, are critical infrastructure and are well established in developed markets around the world, with nothing short of exponential growth ahead. With today’s elevated investor uncertainty due to high inflation, market volatility and rising interest rates, digital assets can offer real value to investors looking for diversification in an area which, despite all of the global economic headwinds, continues to develop and grow.
At IFA Magazine, we’re always looking to bring you something a bit different, and our webinar held in the autumn on this topic, was no exception. We were particularly pleased to see the large number of IFA Magazine readers who tuned in to the webinar on the day, and that many more have listened to the recording subsequently. However, IFA Magazine readers who missed it can use the link at the end of this article to catch up on the discussion.
Uncorrelated asset class offers diversification benefits
For the webinar, we were joined by Matthew Norris, Adviser to the VT Gravis Digital Infrastructure Income Fund and Director of Real Estate Securities at Gravis, and George Nikolaou, Senior Research Analyst at Gravis. During the conversation with IFA Magazine’s editor and webinar chair, Sue Whitbread, Norris highlighted the opportunities that investing in the digital assets sector can offer, as well as exploring the upside for advisers and wealth managers looking to diversify client portfolios in line with today’s changing world.
When it comes to investing in the digital infrastructure space, it became clear during the webinar conversation, that this is a sector which, according to Norris, can be largely uncorrelated to the fortunes – or otherwise – of other ‘must have’ assets even within the wider infrastructure sector. Given the huge levels of market uncertainty and volatility at present, this element is particularly relevant as investors look to diversify their portfolios to minimise risk and volatility.
Norris explained that his team are focused on four key sectors; communication towers, data centres, E-commerce fulfilment centres and fibre optic networks, when it comes to investing in digital assets. The Gravis fund does not invest in hardware or software companies – for example, Meta – whose shares have fallen sharply in 2022.
The Gravis approach is focused on investing in developed market companies, where they see a sizeable opportunity in digital assets, as opposed to higher risk emerging markets. Offering reassurance, they also highlighted how listed companies are able to fund and develop best-inclass next generation digital infrastructure.
As if to emphasise the contrast with the now established, but increasingly volatile, technology sector, the strategy also offers a reliable source of predictable, long-term income. As the conversation developed, Norris explained how and why the ability to deliver growth income – as opposed to fixed income – from these physical assets is so attractive. The approach harnesses the benefits of investing in REITs, which have become an increasingly popular structure for property investment, offering perpetual and uninterrupted liquidity, and which have delivered attractive and tax efficient options as income generating investments.
Weighing up the risks
With any investment proposition, the degree of risk undertaken at both stock and sector level is always a fundamental consideration.
As well as climate change, there are clearly non-macro risks at play here too. Norris explained how leverage, liquidity and quality all need to be carefully monitored as part of the due diligence process. However, with around 70+ listed companies representing a combined market cap of more than £650bn at the time of the webinar, and with an average daily volume of more than £2bn, it was explained how these risks can be brought into perspective.
Investing in an inflationary spiral
When commenting on the current trading and outlook for digital assets, Norris highlighted how the asset class offers investors some realistic protection against the ravages of inflation. With year-on-year UK inflation exceeding 11% in October 2022, this clearly has appeal. But how can the asset class actually deliver such protection? Norris outlined how the contractual rental growth and long-term fixed rate debt which underpins the sector – with 77% of debt fixed at a rate of just 2.1% for an average term of over 6 years in the case of the Gravis fund – ensure that future returns are more predictable than other assets.
What about the ‘R’ word?
Given today’s considerable economic threats and market uncertainty, Norris was asked how he foresees the digital infrastructure sector performing during a recession. He was strong in his conviction that such conditions would still allow for robust returns, due to the underlying diversified tenant base and the fact that this represents business critical spending. With the Bank of England warning the markets of the potential for the longest recession in 100 years, investors will gain considerable solace from an investment thesis focused upon the basics of everyday life, namely mobile communication, online shopping and fulfilment, and internet connectivity.
A positive outlook for dividends
As Norris pointed out, as well as providing strong opportunities for growth, the outlook for delivering a growing income is particularly positive in relation to digital assets. The yield on the Gravis fund was approximately 2.1% at the time of the webinar, and underlying dividend growth for 2022 was circa 10% offering some reassurance.He also stressed the likely benefits of increasing M&A activity for the Fund and for the future; investors in the Fund have already benefitted from 5 takeovers in the 16 months since its launch.
There are also some nascent technologies likely to come on stream that could benefit this sector in the near future. An interesting, but uncertain area being the creeping influence of artificial intelligence, be it in the development of driverless cars or predicting our activity and habits, saving us time and effort in the rather more mundane aspects of our lives. Rounding off the conversation, Norris reminded viewers that management teams of these companies share a positive future outlook, which, he argued, considering the prospect of a global slowdown, adds to the attraction.
With investors looking to maximise diversification within investment portfolios as well as opportunities for growth, the digital assets sector is clearly one which offers strong appeal.
Check out the conversation – download the webinar recording here
About Matthew Norris, CFA – Fund Adviser & Director of Real Estate Securities
Matthew has over two decades investment management experience and specialises in real estate securities at Gravis. He was previously at Grosvenor with responsibility for investing in global real estate securities including the highly successful global logistics strategy.
He joined Grosvenor from Fulcrum Asset Management and Buttonwood Capital Partners where he ran international equity strategies which incorporated exposure to real estate equities.
Matthew graduated from the University of York with a degree in Economics & Politics. He also holds the IMC, is a CFA charterholder and participates on EPRA real estate panel discussions