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Weekly CIO Commentary

Farmland: Cream of the inflation hedge crop?

Saira Malik
Chief Investment Officer
Equities Investment Council member Saira Malik

Bottom line up top:

[Like what you’re reading? Sign up here for Nuveen’s weekly CIO commentary to receive content like this delivered to your inbox every Monday.]

Given still-strong upward pressure on wages, we don’t anticipate the Fed will be looking to cut rates in the near future.
  
CIO weekly commentary chart 2

Portfolio considerations

 

Real assets — historically an effective hedge against inflation — appear well-suited for the current backdrop. Many commodities, such as foodstuffs and raw materials, are components of inflation measurements. As their prices rise, so do the revenues and cash yields for real assets producing these commodities. Additionally, areas such as farmland and timber tend to be less affected by factors that cause day-to-day swings in stock and bond markets, offering a potential source of portfolio diversification.

Investors should consider how much to allocate to real assets, the ability of the asset class to generate attractive risk-adjusted returns and the overall correlations within a portfolio. Figure 2 compares the historical performance of a traditional portfolio consisting of stocks and bonds to portfolios that include real assets, including farmland. While adding farmland on its own significantly improved the historical Sharpe ratio (a measure of risk-adjusted return), other categories of real assets provided benefits as well. Our analysis showed that allocating 5% each to farmland, timber, real estate and infrastructure would have offered compelling results.

  
CIO weekly commentary chart 2

Lastly, in addition to hedging inflation, real assets can potentially enhance the defensive posture of a portfolio, making them worthy investment candidates in advance of a possible recession. Farmland and infrastructure, for example, provide basic necessities, so the demand for the goods and services they produce should be resilient in a weakening economic environment.

Real assets, including farmland, offer the potential to improve risk-adjusted returns in a portfolio.

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

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Investment Outlook CIO commentary archive
Access previous issues of Saira Malik’s weekly CIO commentary on strategy and portfolio construction.
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Endnotes 

Sources

All market and economic data from Bloomberg, FactSet and Morningstar.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

Important information on risk

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Investors should be aware that alternative investments are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. 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. Real asset investments may be subject to environmental and political risks and currency volatility.

Nuveen provides investment advisory services through its investment specialists.

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