Real asset investing has become an increasingly important component of a diversified investment portfolio. Real assets like real estate, commodities, infrastructure and natural resources can provide investors with inflation protection, diversification benefits and attractive risk-adjusted returns. This article will provide an overview of real asset investing and discuss effective strategies to gain exposure to real assets.
Different forms of real assets provide diversification benefits
Real assets are physical, tangible assets like real estate, commodities, infrastructure and natural resources. Investing in real assets can help diversify an investment portfolio and reduce its overall volatility. Real estate provides stable income and value appreciation. Commodities like gold can hedge against inflation. Infrastructure assets generate steady cash flows and are less impacted by economic cycles. Natural resources offer inflation protection as their value is linked to underlying commodity prices. Allocating a portion of the portfolio to real assets can lower correlation with traditional stocks and bonds.
Real assets provide inflation protection
With central banks keeping interest rates low and expanding money supply, concerns over inflation are rising globally. Real assets provide an effective way to hedge inflation risks. As inflation rises, rental income from real estate increases. Commodity prices tend to rise with inflation. Infrastructure assets can include inflation escalation clauses in their contracts. Natural resource values are intrinsically linked to underlying commodities. Therefore, real assets can maintain or even increase their values during inflationary periods. Investing in real assets can help preserve the purchasing power of a portfolio.
Both liquid and illiquid options are available
Investors can gain exposure to real assets through liquid, publicly traded options like REITs, commodity ETFs and infrastructure stocks. These provide easy access but lower returns. Illiquid options like direct real estate, private natural resource funds and unlisted infrastructure involve higher risks and costs but can generate higher returns. The optimal approach is allocating a portion to liquid real asset securities for diversification and the remaining to illiquid options for higher returns. Within illiquid options, investing via fund structures is suitable for smaller investors while co-investing and direct deals are appropriate for larger, institutional investors.
Active management is key to value creation
Passive investing in real asset securities can provide diversification but may not fully capture the return potential. Value creation occurs at the asset level for real assets. Experienced managers with specialized expertise are better positioned to acquire undervalued assets and implement active management and operational improvements to improve returns. Investors should evaluate manager skill in sourcing deals, undertaking due diligence, executing transactions, enhancing operations and exiting assets. Both fund investments and co-investing arrangements allow investors to partner with skilled managers.
In summary, real assets like real estate, commodities, infrastructure and natural resources can enhance portfolio diversification, deliver inflation-hedging ability and provide attractive risk-adjusted returns. Investors should consider incorporating a strategic allocation to both liquid and illiquid real assets. Gaining exposure via skilled fund managers allows investors to tap into the return upside offered by this unique asset class.