Divergent performance across real assets testifies to the importance of active management. Broad market stock indexes have performed well in 2023, driven largely by a handful of mega-cap names in the technology and consumer discretionary sectors. In contrast, performance within, and across, real assets has been more varied, with market leadership shifting throughout the year.

Within real estate, assets more exposed to higher costs of capital and shifting customer demands tried to find a bottom. There were, however, pockets of meaningful outperformance. Data centers, for example, garnered favorable sentiment amid optimism about artificial intelligence. Within infrastructure, rising interest rates weighed on long-duration sectors like communications, whereas master limited partnerships (MLPs) outperformed, supported by strong fundamentals and healthy balance sheets. These divergences make active management very appealing, creating potential opportunities for active managers to capitalize on mispricing dislocations and generate excess returns for investors.

Mergers and acquisition (M&A) activity in 2023 shows there is value to be found in real asset companies. Within infrastructure, recent take-private transactions highlight disconnects between implied valuations in the public market and realized transaction multiples in the private market. Within renewables and sustainable infrastructure, we’ve seen full companies being taken private at a 45% premium over public prices, or individual assets being bought at up to 2x the implied value of the assets in the public market. We believe such transactions demonstrate the attractiveness of quality, essential infrastructure assets. Meanwhile, despite a significant decline in real estate transactions this year, buyers remained active, acquiring high-quality assets in subsectors with strong fundamentals.               

In a highly uncertain environment where fiscal policy has been a bigger economic driver than expected, it’s important to actively focus on quality. 2023 was shaped by macroeconomic and geopolitical uncertainty. Ultimately, however, the U.S. economy strengthened, despite the most aggressive monetary tightening cycle in recent decades. We attribute this surprising economic resilience at least partly to pro-cyclical U.S. fiscal policy, including stimulus designed to spur investment in infrastructure and renewable energy. This unusual combination of stimulative fiscal policy and restrictive monetary policy is making the  Federal Reserve’s (Fed) job harder, and the future impacts of the interplay of those competing forces are uncertain. 

Bears remain committed to the notion of a pending “hard landing” in the coming year, citing persistently tight financial conditions, slower growth and confidence that the Fed has gained the upper hand on higher prices. Bulls, meanwhile, expect a “soft landing,” focusing on improving inflation metrics, the resiliency of the housing market, a tight labor market and consumer strength. With this macro uncertainty likely to persist into the new year, we believe it’s key to work with an active manager that focuses on quality companies with healthy balance sheets, strong pricing power, and stable and growing cash flows.

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