A standard 60/40 portfolio of equities and bonds used to be a favourite for investors, but in an increasingly volatile world, some managers are arguing for greater allocation to real assets.
In 2022, bond and equity indices slid in unison despite typically being negatively correlated, with the MSCI ACWI down 8.1% while the Bloomberg Global Aggregate Bond index fell 5.7%.
Many investors have started to re-examine the standard 60/40 approach and go beyond equities and fixed income. For example, Lansdowne Partners’ head of UK wealth sales, Will Hamilton, recently told Portfolio Adviser that real asset demand will likely continue to grow due to the AI-driven energy and data infrastructure buildout, energy transition and decarbonisation spending, and structural housing undersupply.
See also: In a volatile world, diversification must go beyond 60/40
However, while some investors have started to notice the benefits of real assets exposure, several commodities-focused fund managers have warned that investors must tread carefully.
Vince Childers, real assets fund manager at Cohen & Steers, said: “My big concern is that people refuse to treat real assets as an asset class and get diversified across it.
“I still run into folks who say that I’m going to allocate to this asset class with just some commodities or infrastructure or something like that.
“I think you get better outcomes by expanding the asset class and thinking about it as having become richer,” he told Portfolio Adviser.
Trying to allocate to the likes of commodities and infrastructure as a “tactical” trade is the wrong way to approach the asset class, and is a poor way to handle the volatility in these assets, Childers said.
This is a view shared by other commodity managers, too. George Cotton, manager of J. Safra Sarasin’s JSS Commodity Transition Enhanced fund, added that this is particularly apparent due to how fast-moving the modern financial system is.
“Because central bank debates and geopolitical conflicts can pivot within hours, broad diversification remains essential,” he argued. As an example, he pointed to gold, which many investors mistakenly treat as a “proxy for the entire asset class”.
After a strong run over the past three years (up 95.6%), it is down 7% year to date, according to FE fundinfo. The S&P GSCI Silver Spot price index has performed even worse, down 20.8% so far this year.
Cotton said: “Currently, the precious metals complex faces pressure from higher real rate expectations as US monetary policy shifts.
“Conversely, energy and industrial metals are supported by supply chain disruption, Ukrainian strikes on Russian refining infrastructure, and Latin American mine collapses.”
For example, the S&P 500 energy sector is up by 27.6% so far this year.
See also: Fairview’s Yearsley: Biotech shines in June as commodities fall back
“Real assets represent a long-term structural allocation reflecting persistent physical constraints, not a tactical headline trade to time,” Cotton concluded.
The case for a more diversified allocation to real assets is compounded by the “era of scarcity” in these assets, according to Cohen & Steers’ Childers.
“We’re seeing a world that’s going to have much more inflation risk, much more inflation volatility and is just going to be subject to a lot more negative supply shocks.
“Honestly, it’s the kind of things we’ve seen multiples of in the last few years, including most recently with the Iran conflict.”
See also: Cohen & Steers’ Childers: Real assets in the ‘era of scarcity’
Increasing protectionism between countries, as well as anti-globalisation and underinvestment in alternatives over the past decade, have all meant that many real assets now look much more attractive, he added.
Tony Dalwood, CEO of Gresham House, agreed: “Rising geopolitical tensions, together with ongoing supply chain disruptions and resource constraints, are expected to sustain higher inflation, elevated interest rates, and greater volatility across both equity and bond markets.”
In this environment, real assets offer enhanced diversification, effective hedging against inflation and lower relative volatility, even with relatively modest exposures, he said.
Cohen & Steers Childers continued that while areas such as commodities had experienced an extremely solid run, there was still plenty of upside across the real assets range.
According to the team’s capital market assumptions, real assets could deliver annualised returns from 5.9% (commodities) up to 8.4% (natural resources equities) over the next 10 years.
Resource equities have a “really bombed-out starting point” due to poor capital discipline and a growth-at-all-costs mindset in the 2010’s, giving them significant room for outperformance, according to Childers.
Meanwhile, Global REITs have “come off a very difficult few years”, and so have the potential for multiple expansion on top of solid dividends, he added.
“Even without heroic assumptions, you can get some pretty good growth,” the manager said. “Because these growth trajectories are underpinned by many of the legs behind this era of scarcity, I’d argue they look pretty justifiable.”
