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Building resilient natural capital portfolios through diversification
The lack of correlation across diverse natural capital investment strategies offers great potential for efficiency improvements via portfolio design.
Portfolio diversification is a basic building block of modern portfolio theory and practice for investors in traditional asset classes and real assets alike. Combining uncorrelated assets in a portfolio increases expected returns without additional risk, thereby improving portfolio efficiency—making higher returns achievable at every risk level.
In this paper, we explore the primary sources of diversification in natural capital investments, focusing on geography, market, and crop/species. We highlight risks with potential for mitigation through diversification and examine individual strategies for achieving meaningful diversification. Finally, at the portfolio level, we provide quantitative examples of how diversification can reduce risk and improve the expected performance of natural capital portfolios.
1. Climate Change 2021: The Physical Science Basis, IPPC, August 2021, https://www.ipcc.ch/report/ar6/wg1/
This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement.
This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the views of Nuveen as a whole or any part thereof.
Past performance is not a guide to future performance.Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate. This information does not constitute investment research as defined under MiFID.
A word on risk
Diversification does not assure a profit or protect against loss.
As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
Timberland investments are illiquid and their value is dependent on many conditions beyond the control of portfolio managers. Estimates of timber yields associated with timber properties may be inaccurate, and unique varieties of plant materials are integral to the success of timber operations; such material may not always be available in sufficient quantity or quality. Governmental laws, rules and regulations may impact the ability of the timber investments to develop plantations in a profitable manner. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance and risks related to leasing of properties. Certain products and services may not be available to all entities or persons.
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of nvestment opportunities available, which could result in excluding investments that perform well.
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