Four reasons to consider investing in real assets in 2021 – Expert Investment Views: Invesco Blog
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Real assets are attracting increased attention from investors thanks to their unique risk-return characteristics and income potential. They can also provide exposure to durable global trends such as population growth, urbanization, expansion of the industrial and digital economies, and increasing demand for renewable energy.
As we look ahead to 2021, we see four reasons for investors to consider adding real assets to their portfolios in the new year.
What are real assets?
Stepping back for a moment, real assets are a broad category that includes real estate, infrastructure, natural resources, commodities, agriculture, midstream energy, precious metals and timber, among other things. Direct investments in real assets typically require substantial capital and tend to be relatively illiquid. However, by investing in publicly traded equities of owners/operators in the real assets universe, investors can gain access to these assets with the potential benefits of liquidity, transparency and daily pricing.
Four reasons to consider real assets
We believe that an allocation to real assets can potentially enhance traditional stock and bond portfolios in several ways, offering:
- Competitive historical returns
- Enhanced diversification potential
- A hedge to inflation
- Attractive yield potential
1. Competitive returns
Real assets have historically generated attractive total returns across the full economic cycle. In fact, both real estate and infrastructure companies have delivered competitive returns to US and global equities over the last two decades, and have outpaced the performance of US and global bonds.1
Blending real assets into a traditional 60/40 portfolios over the last two decades could have achieved higher total returns combined with lower volatility, resulting in higher risk-adjusted returns. (See Chart 1.)
Chart 1: Improved performance in 60/40 portfolios through real asset exposure
2. Enhanced diversification potential
Because real assets have different performance drivers, they tend not to move in lock step with traditional investments. This means they can be effective diversifiers due to their low to moderate (and sometimes negative) correlations with traditional stocks and bonds, and with one another. (See Chart 2.)
Chart 2: Real assets can offer diversification benefits
3. Inflation hedge
One of the defining characteristics of most real assets has been their positive sensitivity to inflation (shown in Chart 3), which makes them potentially valuable in helping to protect an investor’s future purchasing power. In this regard, real assets can either drive inflation themselves (e.g., higher energy/commodity/electricity prices) or have intrinsic value tied to rising replacement costs.
For example:
- Real estate owners often have sufficient pricing power to pass higher input costs to tenants by raising rents.
- Infrastructure providers often have longer term contracts or regulated revenue models that include periodic escalators linked to inflation. As inflation rises, their revenues and cash flows do as well, thereby providing an inflation hedge.
- Natural resource companies tend to benefit from higher raw material and commodity prices, as they may earn higher profits on their capital base.
For these reasons, listed real assets can provide a hedge against inflation, both expected and unexpected. Not surprisingly, listed real assets have historically outperformed global stocks and bonds over the last 17 years during periods of rising inflation. (See Chart 3.)
Chart 3: Real assets’ performance during accelerations in inflation
4. Attractive yield potential
As a result of the Federal Reserve and other central banks cutting rates in response to the COVID-19 pandemic, most traditional fixed income currently offers very low yields. However, many listed real assets still offer relatively attractive distribution yields, including real estate, infrastructure and natural resource companies. (See Chart 4.)
Chart 4: Yield comparison for listed real assets
As of Sept. 30, 2020
Retail investors still have room to grow their real asset allocations
Institutional investors often use real assets to buffer their portfolios against the effects of inflation, volatility, currency movements and other macroeconomic factors. According to a recent survey of almost 400 institutions, two-thirds of respondents have allocated capital to real estate, one-third have allocated to infrastructure, and one-third have allocated to natural resources.2 Significantly, the average target allocation for these institutional investors was 9.0% of their total assets to real estate, 4.5% to infrastructure and 3.5% to natural resources.3 The size of these target allocations makes clear that institutions consider these core real assets to be critical components of their overall portfolios.
In contrast, retail investors typically have a much smaller average allocation to real assets — on the order of 2.5% for these three core sectors combined.4 While retail investors have been increasing their allocations over time, these data suggest that they remain meaningfully under-allocated to real assets compared to institutions. As a result, we believe retail allocations to real estate, infrastructure and natural resources could grow over time.
On Dec. 22, Invesco launched the Invesco Real Assets ESG ETF, which provides easy access to a variety of real assets. Learn more.
1 Source: Bloomberg, 12/9/20. Based on data from Jan 1, 2000 through Sept. 30, 2020. Real Estate: FTSE NAREIT Equity REIT Index (1/00 through 2/05) then FTSE EPRA/NAREIT Developed Real Estate (starts from 3/05) Infrastructure: 50% Alerian MLP Index & 50% Dow Jones World Utilities (1/00 through 7/08) Then Dow Jones Brookfield Global Infrastructure Index (starts from 8/08). Based on these indexes, infrastructure had a cumulative return of 1053.9, and real estate 722.62. The S&P 500 Index had a cumulative return of 873.55, the MSCI World Index 500.51, the Bloomberg Barclays US Aggregate Index 349.09 and the Bloomberg Barclays Global Aggregate Index 297.38.
2 Source: Prequin Investor Outlook: Alternative Assets, p. 4, 1H 2020.
3 Source: Prequin Investor Outlook: Alternative Assets, p. 4, 1H 2020.
4 Source: Morningstar Direct, 12/11/20.
Important Information
Blog header image: Aydinmutlu / Getty
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), visit invesco.com for a current prospectus.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.
Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Index. The Fund’s are subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Funds.
The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization.
The MSCI World Index is an unmanaged index considered representative of stocks of developed countries.
The Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index considered representative of the global investment-grade, fixed-rate bond market.
The FTSE NAREIT All Equity REIT Index is an unmanaged index considered representative of US REITs.
The FTSE EPRA/NAREIT Developed Index is an unmanaged index considered representative of global real estate companies and REITs.
The Dow Jones Brookfield Global Infrastructure Index measures the stock performance of companies that exhibit strong infrastructure characteristics.
The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.
The Bloomberg Commodity Index is a broadly diversified commodity price index.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P GSCI Agriculture Index is a benchmark for investment performance in the agriculture market.
The S&P GSCI Industrial Metals Index is a benchmark for investment performance in the industrial metals market.
The S&P GSCI Precious Metals Index is a benchmark for investment performance in the precious metals market.
The S&P GSCI Energy Index is a benchmark for investment performance in the energy market.
The Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index considered representative of the global investment-grade, fixed-rate bond market.
The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
The Dow World Oil Index and Gas is designed to measure the stock performance of U.S. companies in the oil and gas sector.
The Dow World Basic Materials Index is designed to measure the stock performance of U.S. companies in the basic materials industry.
The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified and investable equity exposure across 3 primary commodity-related sectors: agribusiness, energy, and metals & mining.
The Dow Jones World Utilities is designed to measure the stock performance of companies in the utilities industry.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
The S&P GSCI Livestock Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the livestock commodity market.
The S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.
The Bloomberg Barclays Global Inflation Linked Index measures the investment-grade, government inflation-linked debt from 12 different developed market countries
The S&P North American Natural Resources Index provides investors with a benchmark that represents U.S. traded securities that are classified under the GICS® energy and materials sector excluding the chemicals industry; and steel sub-industry.
The S&P Global Timber & Forestry Index is comprised of 25 of the largest publicly traded companies engaged in the ownership, management or the upstream supply chain of forests and timberlands.
The opinions referenced above are those of the author as of Dec. 15, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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