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Keeping it Real: Allocating to Real Assets

Asset Allocations: Real Assets in 2019

What exactly constitutes a real asset, and what are the potential benefits of an allocation to these asset classes for multi-asset investors?  Furthermore, does a rising inflationary tide lift all real asset-laden ships?  

Aquila Capital, bfinance, and other contributors lay the groundwork for an understanding of allocating to real assets as an asset class, while Hermes depicts the present-day inflationary environment.  Additional papers discuss the issues surrounding allocating to sub-asset classes such as commodities, infrastructure, and private real assets like timberland and farmland.  We hope you enjoy our overview of real assets (and real asset sub-asset classes) for multi-asset (and single asset) investors (of assets).

real assets

Real Assets - The New Mainstream (Aquila Capital)

This report by Aquila Capital examines the evolution of real asset investments into institutional investors' mainstream investment strategies.

Rethinking Real Assets (bfinance, 2018)

For multi-asset investors, the benefits of diversification towards real assets may be fairly obvious, but what about diversification within their real asset allocations? bfinance examines the pros and cons of different structures of real asset allocations within multi-asset portfolios.

Understanding and measuring the illiquidity risk premium (Willis Towers Watson, 2016)

In today's world of low returns, investors may opt to take on illiquidity risk in exchange for additional yield. In this paper, the authors discuss varying dimensions of illiquidity risk premium that investors should demand for illiquid assets.

The inflation story: 2019 and beyond (Hermes IM blog, Feb 2019)

The current inflationary environment raises questions about the traditional relationship between prices and slack in the labour market. Given this backdrop, Hermes discusses the projected inflationary environment for 2019.

Real assets: what contribution to asset allocation, especially in times of crisis? (Amundi, 2017)

Sections of this Amundi paper describe how to interpret the real estate cycle as a leading indicator, as well as how real assets have performed during a variety of inflationary cycles.


Farmland investments: implications of the U.S.-China trade war (Manulife AM, Feb 2019)

For compliance reasons, this paper is only accessible in the EMEA region

Manulife Asset Management describes the specific implications of the US-China trade war for farmland investors, including the need to potentially diversify their exposures to particular geographies, crop types, and global export markets.

Timberland and Farmland: Working Together in a Mixed Asset Portfolio (Manulife, 2018)

For compliance reasons, this paper is only accessible in certain geographies

Timberland and farmland have traditionally been treated by investors as separate asset classes, yet they have similar (and potentially complementary) characteristics. The authors look at the benefits of each asset class individually, as well as within a combined timberland/farmland model portfolio.

Private real assets: improving diversification with uncorrelated exposures (Nuveen, 2018)

Heightened volatility in traditional assets has led some institutional investors to consider private investments in real assets, due to diversification benefits as well as their low (or negative correlations) to other asset classes.

Intellectual Property as a Real Asset (Barings, 2018)

What constitutes a real asset? Although there is no standardized definition, Barings describes the overlapping characteristics of this asset class and postulates that intellectual property could also be considered under the real assets umbrella.


Infrastructure Outlook: Top Trends in 2019 (UBS AM)

The authors focus upon three themes that could aide investors in Europe and North America to make portfolio allocation decisions around infrastructure assets.

The role of infrastructure in a portfolio (Vanguard, 2018)

Vanguard investigates the investment characteristics of infrastructure assets, and what they can contribute to a multi-asset portfolio, finding that this asset class may historically have fallen short of expectations regarding its effectiveness as an inflation hedge.

Approaches to Benchmarking Listed Infrastructure (S&P Dow Jones Indices, 2019)

S&P Dow Jones Indices describes approaches to benchmarking publicly listed infrastructure securities, as well as motivations for investors to allocate to (or increase exposure to) infrastructure assets.


The Role of Commodities During Periods of Unexpected Inflation (Parametric, 2018)

Traditional assets (stocks and bonds) typically perform well in an environments consisting of low to moderate expected inflation, but in periods of unexpectedly high inflation, commodities tend to outperform.

From boom to bust: A typology of real commodity prices in the long run

This study covers 30 commodities over a 160-year period, aiming to reclassify real commodity prices, trends, and cycles over multiple time horizons.


Real Assets' Role in Public Pension Portfolios (JP Morgan AM, 2018)

There has been a recent shift amongst institutional portfolios to increase allocations to real assets. The authors address how public pensions can construct or add to their portfolios of real assets.

The Benefits of Real Assets Diversification in DC Pension Plans (Cohen & Steers, 2017)

Fiduciaries of defined contribution pension plans may wish to consider liquid real assets, as central bankers pivot away from QE and towards reflationary environments.



The term "real asset" is used by different people to mean slightly different things. Some investors consider a real asset to be an asset which is in someway "tangible" or "physical". Asset classes which fall under this category include real estate, infrastructure, farmland and timberland. All of these, of course, tend also to be Private Assets - illiquid, difficult to trade, and therefore more appropriate as long-term strategic holdings. To this list of tangible assets, one might also add physical commodities (which of course are more liquid and easily tradable).

Other investment professionals (particularly those with an actuarial perspective) might define "real assets" as those asset classes which provide long-term inflation protection. In other words, they have a higher probability of delivering a postive "real return" in an inflationary environment. Using this definition, inflation-linked bonds would be considered a "real asset".

In practice, the difference between the two definitions is small, because the first group (real estate, infrastructure, commodities, farmland and forestry) all possess, to some degree, characteristics of inflation protection.

However, it would be reasonable for investors to ask "How real are real assets"? This is a question that was considered in a recent article by Northern Trust. They concluded that inflation-linked bonds and commodities (natural resources) may be the best asset classes for protection against unanticpated inflation.

Historically, Commercial Property has been the dominant "real asset" in the portfolios of institutional investors, with other "real" asset classes being relatively peripheral. But in recent years, large asset allocators have been increasing their allocation to alternatives such as infrastructure investment, timberland and agricultural land.