Investing in Real Assets

Investing in Real Assets

How to Invest in Real Assets

Real assets exist in the physical world, and their value derives from their physical qualities. This contrasts with financial assets, like stocks, bonds, cash, and cryptocurrencies that are intangible. Like financial assets, the value of real assets depends on their cash flow generation potential.

What Are Real Assets?

Real assets include:

• Real estate – physical houses, buildings and warehouses
• Natural resources – oil and gas
• Metals and minerals – gold, silver, uranium
• Timber and farmland or agricultural commodities – corn and sugar
• Infrastructure – energy pipelines and phone towers
• Transportation – Roads, airports, railroads
• Utilities
• Physical equipment – factories, machinery, buildings

These real assets have their valuations tied to cash flow and how much investors are willing to pay for the future stream of earnings. However, one of the primary differences between many stocks and real assets is that real assets have intrinsic value in and of themselves.

Investing in a real asset typically has the following benefits:

• Earns good cash on cash yield
• Contracted for a long duration
• A stream of cash flows that are tied to inflation
• Lower volatility because they are privately owned

Real assets are popular with institutional investors (such as insurance companies and pension plans) because of these benefits. Overall, real assets represent more than $10 trillion out of $27 trillion of global institutional assets under management in 2019.

Why Invest in Real Assets?

Due to their low correlation to other financial assets, real assets offer investors the opportunity for diversification. Diversifying can help you lower the investment risk in your portfolio. When you diversify, you hold investments that can have a different reaction to different market events.

As Cesar Perez Ruiz, Chief Investment Officer (CIO) at Pictet Wealth Management, said to the Financial Times: “Real assets are a good late-cycle investment, when increasing volatility can offer interesting entry points into areas that have low correlation with other asset classes” (1). The low correlation with other asset classes makes real assets valuable as a diversification tool.

Real assets are particularly well-suited investments during inflationary times because of their tendency to outperform financial assets during such periods (2). The S&P 500 Real Assets Index, which launched at the end of 2005, has outperformed the S&P 500 in every high inflation year since its inception (3).

The asset management giant Blackrock looked at average annual returns in different regimes of growth and inflation over the past 20 years. It found that U.S. and global real estate, as well as global infrastructure, beat stocks and bonds when inflation is high. Outperformance was seen in both low and high periods of growth (4).

Real assets also appeal to investors searching for reliable income. Cash flow from real assets like land, infrastructure, and real estate projects can provide sound and steady income streams to investors.

However, keep in mind that real assets are often less liquid (harder to sell quickly) than financial assets. In addition to the lower liquidity, real assets can have higher storage costs and can be costly to turn from a raw material into the finished goods desired by the market (see our article on Uranium as an example).

Another interesting aspect of the real assets market is that it can be inefficient relative to the stock market. Real assets prices might be updated less frequently than a stock price (which can change by the second), so the “prices listed in a market for real assets generally are also rougher with a larger spread” (5). This can also lead to an arbitrage opportunity – or the ability to exploit pricing differences in different markets.

How to Invest in Real Assets

One of the benefits of investing in real assets is that you don’t require a down payment on a house to be able to invest in real estate and you don’t need to be able to buy a brick of gold to include precious metals in your portfolio. Unlike buying a building or owning a forestry business, by investing you can just own a fraction of a real estate investment trust or buy a share of a company that owns a lumber forest.

Investors can also gain exposure to these types of investments through individual stocks, ETFs and mutual funds. A simple search on Magnifi will help you find numerous ways to invest into real assets:

• Invest in Real Assets
• Invest in Lumber
• Invest in Real Estate
• Invest in Metals

References:

1. Vincent, Matthew, “Real assets, however niche, can offer stability in late-cycle markets,” Financial Times, 17 October 2019, https://www.ft.com/content/9d4118b2-d928-11e9-9c26-419d783e10e8
2. “Inflation and Real Assets,” Blackrock, https://www.blackrock.com/institutions/en-us/insights/investment-actions/inflation-and-real-assets
3. Bingham, Bryce, “The Case for Investing in Real Assets,” Alerian, September 2020, https://f.hubspotusercontent40.net/hubfs/6996040/The%20Case%20for%20Investing%20in%20Real%20Assets.pdf
4. Idzelis, Christine, “How real assets stack up to stocks, bonds when inflation is high, says BlackRock, 28 August 2021, https://www.marketwatch.com/story/how-real-assets-stack-up-to-stocks-bonds-when-inflation-is-high-says-blackrock-11630013493
5. Borga, Lisa, “Real Assets: Defined along with types and examples,” FundsNet, 17 October 2022, “https://fundsnetservices.com/real-assets”

Disclosures:

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.