The power of private real assets
Private real assets are a powerful tool for institutional investors. Our latest research demonstrates private real assets’ potential to deliver uncorrelated returns, making them a key element for diversifying portfolio risk. They can also play a role in tackling some of the big issues investors currently face, particularly the increasingly inflationary environment and growing demand for sustainable investments.
Surging energy and food prices, coupled with labor shortages in many developed economies are fueling inflation pressures, leaving investors grappling with higher rates and continued economic uncertainty. Real assets can help given they offer a combination of inflation-hedging and defensive properties, and our analysis shows how adding them to a traditional portfolio can reduce volatility while achieving compelling returns.
We also consider how real assets can incorporate responsible investing practices and help investors achieve their responsible investment goals.
- Private real assets are a powerful source of diversification for institutional investors. Private investments in the relatively illiquid categories of real assets — farmland, timberland, infrastructure and commercial real estate — have exhibited low or negative correlations to stocks and bonds. For the past three decades, real assets have generated higher returns than traditional investments, with significantly lower volatility.
- Portfolio optimization using 30 years of returns demonstrated private real assets’ potential to improve the risk-adjusted returns of traditional stock-bond portfolios, and to diversify risks associated with publicly traded commodities, infrastructure stocks and real estate investment trusts (REITs).
- Results supported combining multiple categories of real assets and constraining overall allocations within practical limits, such as 10% or 20%.
- Responsible investing within private real assets poses a different set of challenges and opportunities for investors.