Ceri Austin 
Real assets are tangible physical investments with intrinsic value based on their substance and properties, making them a popular alternative investment that offers diversification, inflation hedging and potential income generation benefits.
Real assets listed for investment may include real estate, land, commodities or infrastructure. Read on to discover how these investments may form the cornerstone of an effective portfolio strategy.
Diversification
Diversifying your portfolio effectively is key to achieving consistent returns over time and protecting against market risks. Review your portfolio to ensure it fits with your financial goals, risk tolerance and investment time horizon.
One way of diversifying investments is selecting investments with differing degrees of risk and return potential, including stocks, bonds, real estate investments, reinsurance policies, commodity funds or even more unconventional approaches like cryptocurrency.
Diversifying by investing in companies of varying sizes and investment styles – like value investing – reduces your exposure to one specific industry sector that could be affected by economic changes, technological innovations or regulatory shifts. Diversifying your portfolio further by investing in different kinds of property – be it commercial, industrial or multifamily real estate – is another way to diversify. Diversifying by time horizon can also help mitigate volatility while increasing potential returns, providing long-term, flexible liquidity-rich assets like commodities or real estate with long-term investments like commodities or collectibles that provide slower gains, as well as those that provide fast gains like hedge funds or private equity investments. Doing this may lower overall volatility while simultaneously increasing returns potential.
Inflation Hedging
Inflation poses a constant threat to investors’ investments. It raises operating costs for companies, reduces consumer spending and curbs earnings growth expectations.
To avoid inflationary pressures, investors seek assets that maintain or increase in value during inflationary times. Real estate can often serve as an effective inflation hedge as its values tend to rise with inflationary costs of living – adding real estate investment trusts (REITs) can give your portfolio this exposure without the hassle of managing property directly.
Diversifying globally can also help offset inflationary cycles. Stocks from overseas companies do not typically follow domestic markets up or down; and bonds issued by foreign issuers may provide protection from domestic inflationary cycles.
Liability Matching
Asset-liability matching involves selecting investment assets to correspond with future liabilities, in order to minimize reinvestment risk, liquidity risk and action bias while mitigating inflation risk and covering various expenses such as contributions, expenses or charges.
For instance, if you plan to buy a house within five years it would be unwise to invest the deposit money in stocks as they could decline by as much as 30-40 percent and prevent you from making the purchase. Instead it is prudent to choose bonds which mature around the same time as your mortgage repayment schedule to limit exposure to interest rate changes and limit any possible missed opportunities.
Liability-driven investing (LDI) requires rigorous analysis, disciplined rebalancing and vigilant monitoring in order to be successful. Accurate valuation methods and realistic assumptions must also be employed so as to prevent mismatches with actual portfolio positions – this makes liability-driven investing a critical component of overall financial stability for banks, insurers and pension plans with substantial balance sheets; however evolving regulations regarding capital, leverage and liquidity may impede their use as effective hedges against risk.
Stability
Real assets offer an ideal mix of income-producing potential: bond-like yields and equity-like capital appreciation from long-term contracts, concessions or leases with reliable cash flows that contribute to resilient cash flows tied to them. Real asset investments may help your portfolio stay steady even during volatile markets – providing support in down markets as well as overall stability.
However, each tangible asset class’s market behavior differs significantly and can change with various external influences. Therefore, investors must fully research each real asset category so as to understand their specific risks and opportunities.
Real assets provide inflation protection, diversification from equities, and income generation – three key objectives investors typically look for in their investment portfolios. Thanks to publicly listed real estate and infrastructure companies, mass affluent investors can now more easily gain access to this asset class in an cost effective manner – active managers can utilize broadening opportunity sets by adding these investments while still meeting policy-driven strategic weight objectives in a broad, liquid environment.
