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Diversification
June 6, 2022

What are the tangible benefits of investing in real assets?

“Traditional ‘balanced’ portfolios, typical within the wealth management industry, are no longer fit for purpose in our opinion. These portfolios rely heavily on bonds that currently do not provide a ‘real return’ after inflation unless taking on significant credit risk.

Yet many investors still consider this a safe asset class without realizing their capital is likely to be diminishing in real terms. Amid rising interest rates and higher inflation it is necessary to look outside the traditional tool kit to so-called ‘real assets’, which have a bigger role to play in a well-constructed portfolio. Unlike conventional stocks and bonds, the value of these investments comes from the physical nature of the underlying asset, for example infrastructure, commodities, real estate, land and natural resources.

Why own real assets?
Investors are being forced to think about inflation for the first time in years as it reaches multi-decade highs, and they are now grappling with how best to construct their portfolios accordingly. Real assets can help you hedge against inflation, which increases as economic activity accelerates.

The rationale is that when demand for goods and services increases, so do prices (causing inflation), as do the commodities used to produce them. Infrastructure and real estate are good examples of such assets that can help protect against inflation. Infrastructure companies are less dependent on the economic cycle, which provides inflation protection through their pricing power.

Real estate companies usually structure their leases with an inflationary underpin to preserve the value of their income generation against rises in the cost of living, benefiting the investor. Additionally, both infrastructure and real estate investments provide long-term income, which is attractive in a low-rate environment and can help cushion total returns in times of volatility.

The need for diversification
Real assets can also provide genuine diversification in a portfolio as they tend to exhibit a lower correlation with more traditional equities and bonds. Commodities are ‘defensive’ real assets that tend to perform well in times of market stress. This is particularly evident right now. Geopolitical tensions are unprecedented following the Russian invasion of Ukraine and we are entering the uncharted water of global economic sanctions, which are increasing in scale almost daily.

It is impossible to know what the overall impact will be but while equities are reacting with high volatility as one would expect, staples such as wheat, oil, gas, gold and industrial metals are performing very strongly. Furthermore, the economic backdrop was already supportive for commodities as inventories are tight on the back of supply chains being disrupted by Covid – an issue only heightened by the geopolitical situation”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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