Real Assets
As traditional asset classes rose and fell in unison, investors found it more difficult to diversify their portfolios and reduce the impact of market volatility. Convergence among traditional asset classes spurred institutions to allocate investments to alternatives– hedge funds, private equity, and direct investments in real assets– offering low correlations to public markets.
Attractive investment and demand characteristics make real assets compelling, but also pose difficult implementation questions: How should investors structure a portfolio of real assets? How might allocations change for different investor risk and return preferences? No single, optimal allocation fits all risk profiles. Allocations should reflect individual investment objectives, risk tolerance, and liquidity needs. We use mean-variance optimization analysis to show the potential impact of real assets on a range of portfolios representing different risk profiles and constraints.
Private real assets offer compelling potential to enhance risk-adjusted returns, based on low correlations with other asset classes, and hedge inflation. As long-term investments, their benefits provide some compensation for their relative illiquidity. They can combine bond-like income from land leasing and equity-like returns from long-term appreciation in land values to hedge inflation. In sum, real assets can support asset-liability matching, with potential for improved long-term portfolio returns to meet future obligations—and lower volatility of returns to meet current liabilities.
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