Growing numbers of investors have steadily increased their real asset allocations. Many investors have discovered the benefits of real assets in potentially providing long-term total returns, inflation protection and the difference in historical correlation with equity and fixed-income invest¬ments. We believe investors are looking for what real assets can offer: the potential for income, diversification and assets linked to inflation in an unclear global environment.
Real assets—which we define as real estate, infrastructure and natural resources— form the pillars of the global economy. As such, these classifications are inherently tied to global developments, inflation and other macroeconomic trends. Notably, the cash flows that historically have been produced by real assets can be valuable in times of both economic expansion and contraction. Real assets represent physical assets that are often linked to inflation—a favorable characteristic as potential demand rises in periods of economic expansion. At the same time, the increasing demand for the goods and services that real assets provide may be relatively predictable and inelastic (insensitive to changes in price or income), which can be helpful in periods of economic uncertainty.
Real asset returns have historically had low correlations to traditional equity and fixed-income investments, which our findings suggest they can provide an effective way to enhance the diversification of a traditional stock and bond portfolio. Individual real asset categories have historically displayed correlations with each other that may provide investors with an opportunity to diversify their holdings into more than one real asset class in order to enhance overall diversification within their portfolio.
Adding real assets may also enhance the risk-adjusted returns of a mixed-asset portfolio. The chart below shows the various historical Sharpe Ratios of the three real asset categories in comparison to equities and bonds. The Sharpe Ratio is a measure of return per unit of risk, which indicates whether an investment’s return sufficiently rewarded investors for the level of risk assumed (the higher the Sharpe Ratio, the greater the level of risk-adjusted performance). For example, the 10-year Sharpe Ratio for Infrastructure as defined in the chart below is .570 which means that an investor should have a greater risk-adjusted return in comparison to an investment in a Treasury bond which has a Sharpe Ratio of zero. Only when an investor compares one investment’s Sharpe Ratio with that of another investment can the investor get a feel for the return versus the relative amount of risk they can expect to take to achieve that return.
Rising BES is one indicator that investors have historically used to measure expectations for higher inflation. We believe that there are two drivers of inflation — demand-driven and supply-driven inflation. Many economists believe that demand-driven inflation can be labeled as “good inflation” because often times it reflects overall economic growth, such as an increase in average hourly earnings, and stimulates the supply of goods and services. Supply-driven inflation can be labeled as “bad inflation” because it may reflect non-economic drivers, such as the price of oil, which can have a negative impact on both the supply chain and labor markets and tends to cut demand.
FTSE EPRA/Nareit Global Real Estate Index (FTSE EPRA/NAREIT Global Index) is an index designed to track the performance of listed real estate companies in both developed and emerging countries worldwide.
S&P Global Infrastructure Index (S&P Global Infrastructure Index) is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability.
Standard & Poor’s Global Natural Resources Index (S&P Global Natural Resources Index) includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified and investable equity exposure across 3 primary commodity-related sectors: agribusiness, energy, and metals & mining.
MSCI World Index a market cap weighted stock market index of companies throughout the world and is used as a common benchmark for ‘world’ or ‘global’ stock funds intended to represent a broad cross-section of global markets.
Bloomberg US Aggregate Bond Index (Bloomberg Aggregate Index) is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash flow can be positive or negative.
1 Federal Reserve Bank of St. Louis. In this analysis we are making a comparison between the differences between the 5-Year TIPS rates and the 5-Year nominal Treasury rates and the differences between the 10-Year TIPS rates and the 10-Year nominal Treasury rates in order to construct a U.S. Breakeven 5-Year rate and the U.S. Breakeven 10 Year rate using data available as of 11/30/2021.
Three Reasons for GUNR
Three reasons to consider a strategic allocation to natural resources as a defense against inflation
Investing Strategies for Volatile Energy Markets
Natural resources and infrastructure strategies can help portfolios during energy price spikes
Prepare for Rising Rates
Historical data helps identify assets that may be positioned to fare well when higher rates threaten fixed-income and equity returns