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Private real assets: Improving portfolio diversification with uncorrelated market exposure
Portfolio analysis demonstrated private real assets’ potential to improve the risk-adjusted returns of traditional stock-bond portfolios.
- Recent periods of heightened market volatility — often combined with subpar stock and bond performance — have prompted institutional investors to consider alternatives, such as real assets.
- Private investments in relatively illiquid categories of real assets — farmland, timberland and commercial real estate — have exhibited low or negative correlations with stocks and bonds, diversifying portfolio risk. For the past two decades, real assets have generated higher returns than traditional investments, with significantly lower volatility.
- Portfolio optimization using 26 years of returns demonstrated private real assets’ potential to improve the risk-adjusted returns of traditional stock-bond portfolios, and diversify risks associated with publicly traded commodities 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%.
Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. 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. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.