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Real Assets Investing

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The industry term "real assets" is a bit clumsily defined. Our primary asset classes in this category — natural resources, global real estate and listed infrastructure — aren't technically real assets (like physical gold). Instead, they are equity based. But we believe they can provide real benefits to the portfolio, including diversified risk exposures and, in some cases, inflation protection (see Exhibit 1).

"Performance Match" refers to monthly investment performance gross of fees and expenses of those asset classes that matched the same level as the monthly publically announced rate of inflation during that time frame. "High inflation" refers to a publically announced rate of inflation above 2.98% which is in the 75th percentile of data and "normal inflation" refers to a publically announced rate of inflation below 2.98%.

Chart: Performance Match

The three "real asset" asset classes all have equity market exposure. In addition, Natural Resources have Emerging Market equity and commodity exposure; Real Estate and listed Infrastructure have term interest rate exposure, and Real Estate has credit exposure.

We believe an equity-based approach to natural resources may be a good alternative way to gain commodity exposure versus a futures-based approach. Historically speaking, it has materially and persistently outperformed a futures-based approach. In Exhibit 2, we compare the 5-year rolling returns of two indexes, the Bloomberg Commodity Index and the Morningstar Global Upstream Natural Resources Index, and plot whichever index exhibited the projected higher 5-year rolling return for that month with the corresponding return of only that index. Because in every case during the 06/29/2011 to 06/30/2018 time frame, the monthly projected 5-year rolling returns of the Morningstar Global Upstream Natural Resources Index were higher, within Exhibit 2 we never posted the returns of the Bloomberg Commodity Index nor any of its corresponding returns.

Chart: Which Approach Worked Best

Driving this outperformance was the equity market exposure, but commodity prices still played a large part in the return expectation. The modest growth environment during the time frame — combined with OPEC-controlled supply — which steadily removed the oil glut of the prior decade also played a role. We believe that the continued rise of the Emerging market middle class should support commodity demand more broadly.

Investors seeking potential inflation protection through an equity-based approach may want to consider the FlexShares Morningstar® Global Upstream Natural Resources Index fund (GUNR) which is designed to give investors exposure to global equity securities with an emphasis on the "upstream" portion - referring to the very beginning of the supply chain where the resources are "in the ground." It is a focused, convenient way for investors seeking to potentially capture the favorable growth and price impacts of the global demand for natural resources.

Chart: Sector Allocations for GUNR fund

The Fund invests in global companies focused in the energy, metals and agriculture sectors, while maintaining a core exposure to equities in timberlands and water resources sectors. By allocating a dedicated exposure to timber and water resources, diversification within the natural resource space is increased. This provides investors with broad coverage of the upstream natural resource supply chain. The Fund's methodology seeks to prevent any one area in natural resources from dominating or skewing overall exposures and performance.


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The FlexShares approach to index-based investing is, first and foremost, investor-centric and goal oriented. We pride ourselves on our commitment to developing products that are designed to meet real-world objectives for both institutional and individual investors. If you would like to discuss the attributes of any of the ETFs discussed in this report in greater depth or find out more about the index methodology behind them please don't hesitate to call us at 1-855-FlexETF (1-855-353-9383).