X

Inflation sensitivity: The unifying attribute of real assets

By Vince Childers, head of real assets multi-strategy and portfolio manager at Cohen & Steers

Real assets have a history of helping portfolios during market conditions that tend to be challenging for both stocks and bonds, enhancing the diversification potential of traditional asset allocation mixes. The most common of these market scenarios has been the occurrence of unexpected inflation. Whereas inflation surprises have historically had a mixed effect on stocks and bonds, real assets have demonstrated strong, positive correlations, indicating a tendency to deliver above-average returns when inflation exceeds expectations.

The persistence of surprisingly low inflation over the past decade has worked against real assets, contributing to their underperformance in recent years, particularly in commodities. However, with real assets now trading near multi-decade relative lows, we believe more attractive relative value, combined with increased inflation risk and improving fundamentals, has created a particularly compelling backdrop.

A real assets blend offers potential diversification benefits

One way to gain broad exposure to real assets is through a portfolio that invests across categories such as real estate, infrastructure, commodities and natural resource equities. Each of these asset classes has distinct economic sensitivities that have historically resulted in diversifying correlations with each other and with stocks and bonds. As a result, a diversified blend of real assets may offer an effective way for investors to target common objectives of a real assets allocation—such as enhancing diversification, expected returns and inflation sensitivity—while potentially dampening the swings that investors may experience with separate allocations to individual asset classes.

Matching real assets characteristics to objectives

The performance profiles of different types of real assets show the flexibility in various exposures and/or combinations that may make sense depending on specific portfolio objectives. A multi-strategy diversified real assets solution may be well suited for providing greater levels of inflation beta, whereas real estate or global listed infrastructure assets may offer greater total return potential with enhanced inflation sensitivity. Additionally, most real assets tend to be effective portfolio diversifiers due to their distinct economic drivers.

Featured News

This Week’s Most Read

Wealth DFM