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Nuveen knows: alternatives

Portfolio construction: Synthesizing global and local factors within a portfolio

Introducing real assets to an existing portfolio of stocks and bonds has the potential to

  • diversify risk and return factor exposures

  • offer a natural inflation hedge

  • expand a portfolio’s source of return

  • reduce correlations to other assets

Real assets offer opportunities for many outcomes: income, growth and uncorrelated returns

To start, it is important to understand that the primary components of return from real assets such as farmland and real estate are ownership and income, typically derived from rents, and appreciation gains, earned from the sale of properties. Additionally, the factors that drive the value of these assets tend to be much more idiosyncratic than one would find in a traditional equity or fixed income investment, since returns are specifically tied to their type of asset and region, meaning different crops, building types and geographies. 

We think constructing investments of real assets should be driven by diversifying various factor exposures. 

From a fundamental perspective, these investments also have several built-in advantages. Farmland investments benefit from the fact that people’s need for food, fiber and fuel are not cyclical, can’t be avoided and are growing. An expanding and increasingly urbanizing world population is causing demand for crops to increase, but supply is not growing as fast as demand, leaving the agricultural industry with the need to produce more food on less arable land. This should boost long-term farmland productivity and provide a tailwind to prices. Similarly, real estate investments benefit from favorable supply/demand factors due to population growth, urbanization, innovation and technological advancement.

But as we stated earlier, the returns from these asset classes are highly idiosyncratic. And we think that taking a global approach to diversify investments by geography and asset type can infuse a portfolio with natural risk hedges. For instance, when geopolitical conflicts favor one region over another (such as the U.S./China trade conflict providing a headwind for U.S. farmland but a tailwind for Brazil), or when technological and urban advancement makes certain cities and geographies more desirable than others (consider faster economic growth rates in the Asia Pacific region than in the U.S. and Europe) it creates possible investment opportunities.

Building portfolios: how to add real assets into the mix

When we work with investors to build portfolios of real assets, we first define critical goals such as their desired investment outcome, time horizon and risk tolerance and other considerations such as a need to focus on responsible investments. Each investor, of course, is unique and has their own goals and risk tolerances, but we believe the potential diversification benefits make sense for almost all investors, whether they are focused on long-term growth, generating current income, managing an asset/liability mix or other objectives.

Real assets may make sense for nearly all investors regardless of their investment objectives. 

We compared private real assets with publicly traded stocks and bonds to assess the diversification benefits against the illiquidity of private assets. We believe real assets play an important role in any diversified investment portfolio as this unique asset class provides several benefits that differ from traditional risky assets such as stocks and bonds. As shown in Figure 7, allocating a portion of real assets may benefit both income-oriented and growth-oriented investors from a risk-adjusted return perspective thanks to their historically low correlation with these other asset classes.

Real assets had low correlations to other asset classes — and to each other.

Correlation of real assets, commodities and REITS (1992 – 2017)


When approached through the lens of considerations such as climate change, geopolitical conflict and changing consumer trends and preferences, we believe factor exposure diversification can provide a potential hedge against uncontrollable risks that affect regions differently, while also providing possible diversification benefits. Of course, analyzing these sorts of factors can be incredibly complicated, which is a key reason we think investors should  partner with professional investment managers who have experience in creating portfolios of real assets. Figure 8 shows some of the factors our real assets and Solutions teams consider when selecting real estate and farmland investments for our clients. 

Investors need to consider multiple idiosyncratic risks and opportunities when building portfolios

While there are immense benefits of adding global direct real assets to a well-balanced portfolio, investors should consider foreign exchange risks, illiquidity risk, currency risks and geopolitical risks. However, we do believe the pros outweigh the cons for long-term-oriented investors seeking compelling risk-adjusted returns. 

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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 is no guarantee of 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.


Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. The “Shiller” P/E Ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. Bloomberg Barclays U.S. Aggregate Index represents securities that are SEC registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,853 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. The FTSE NARIET All REITs Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The NCREIF Farmland Property Index is a quarterly time series composite return measure of investment performance of a large pool of individual farmland properties acquired in the private market for investment purposes only. The NCREIF Property Index (NPI) is a quarterly, un-leveraged composite total return for private commercial real estate properties held for investment purposes only. The NCREIF Timberland Index is a quarterly time series composite return measure of investment performance of a large pool of individual timber properties acquired in the private market for investment purposes only. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. S&P GSCI Agriculture Index has been designed to provide an exposure to the agriculture sector in commodity asset class on a total return basis. The S&P Global Timber & Forestry Index is comprised of 25 of the largest publicly traded companies engaged in the ownership, management or the upstream supply chain of forests and timberlands.

A word on risk

Investing involves risk; principal loss is possible. 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. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not suitable for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. 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 estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, currency movement risks and potential environmental problems and liabilities. Farmland investments 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.

Nuveen provides investment advisory services through its investment specialists.

This information does not constitute investment research as defined under MiFID. In Europe this document is issued by the offices and branches of Nuveen Real Estate Management Limited (reg. no. 2137726) or Nuveen UK Limited (reg. no. 08921833); (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN), both of which entities are authorized and regulated by the Financial Conduct Authority to provide investment products and services. Please note that branches of Nuveen Real Estate Management Limited or Nuveen UK Limited are subject to limited regulatory supervision by the responsible financial regulator in the country of the branch