Investing in Real Assets

How to Invest in Real Assets

Real assets exist in the physical world, and their value derives from their physical qualities. This contrasts with financial assets, like stocks, bonds, cash, and cryptocurrencies that are intangible. Like financial assets, the value of real assets depends on their cash flow generation potential, making them a crucial component of a balanced real assets portfolio.

Real Asset Definition: What Are Real Assets Investments?

When investors ask, "what are real assets investments?" the real asset definition encompasses anything you can see, touch, or smell that holds intrinsic value.

Real assets include:

• Real estate – physical houses, buildings, and warehouses
• Natural resources – oil and gas
• Metals and minerals – gold, silver, uranium
• Timber and farmland – agricultural commodities like corn and sugar
• Infrastructure – energy pipelines and phone towers
• Transportation – roads, airports, railroads
• Utilities
• Physical equipment – factories, machinery, buildings

These real assets have their valuations tied to cash flow and how much investors are willing to pay for the future stream of earnings. However, one of the primary differences between many stocks and real assets is that real assets have intrinsic value in and of themselves.

Real assets investing typically offers the following benefits:

• Earns good cash-on-cash yield
• Contracted for a long duration
• A stream of cash flows that are tied to inflation
• Lower volatility because they are privately owned

Overall, real assets represent more than $10 trillion out of $27 trillion of global institutional assets under management.

Why Invest in Real Assets?

If you are wondering why invest in real assets, the primary answer is diversification. Due to their low correlation to other financial assets, a real assets portfolio helps lower investment risk. When you diversify, you hold investments that react differently to various market events.

As Cesar Perez Ruiz, Chief Investment Officer (CIO) at Pictet Wealth Management, noted: “Real assets are a good late-cycle investment, when increasing volatility can offer interesting entry points into areas that have low correlation with other asset classes” (1).

Inflation Protection

*Real assets investments are particularly well-suited for inflationary times because they tend to outperform financial assets. The S&P 500 Real Assets Index has outperformed the S&P 500 in every high inflation year since its inception in 2005 (3).

The asset management giant BlackRock looked at average annual returns in different regimes of growth and inflation over the past 20 years. It found that U.S. and global real estate, as well as global infrastructure, beat stocks and bonds when inflation is high, regardless of the overall growth environment (4).

Reliable Income and Potential Drawbacks

Real assets also appeal to investors searching for reliable income. Cash flow from land, infrastructure, and real estate projects provides steady income streams.

However, keep in mind that real assets are often less liquid (harder to sell quickly) than financial assets. They can also carry higher storage costs and require capital to turn raw materials into finished goods (see our article on Uranium for an example).

Another interesting aspect of the real assets market is its inefficiency relative to the stock market. Because prices are updated less frequently than stocks, the market generally has a larger spread, which can lead to arbitrage opportunities (5).

Real Assets Investment Solutions for Beginners

One of the greatest benefits of modern real assets investment solutions[cite: 12] is accessibility. You do not need a massive down payment to invest in real estate, nor do you need to buy a physical brick of gold.

Instead of buying a building or a forestry business outright, a real asset investor can purchase a fraction of a Real Estate Investment Trust (REIT) or buy shares of a company that owns a lumber forest. Investors can easily gain exposure to these physical markets through individual stocks, ETFs, and mutual funds.

A simple search on Magnifi will help you discover targeted investment discovery options and portfolio analysis tools to ensure your new assets align with your broader financial plan.

References:

1. Vincent, Matthew, “Real assets, however niche, can offer stability in late-cycle markets,” Financial Times, 17 October 2019, https://www.ft.com/content/9d4118b2-d928-11e9-9c26-419d783e10e8
2. “Inflation and Real Assets,” Blackrock, https://www.blackrock.com/institutions/en-us/insights/investment-actions/inflation-and-real-assets
3. Bingham, Bryce, “The Case for Investing in Real Assets,” Alerian, September 2020, https://f.hubspotusercontent40.net/hubfs/6996040/The%20Case%20for%20Investing%20in%20Real%20Assets.pdf
4. Idzelis, Christine, “How real assets stack up to stocks, bonds when inflation is high, says BlackRock, 28 August 2021, https://www.marketwatch.com/story/how-real-assets-stack-up-to-stocks-bonds-when-inflation-is-high-says-blackrock-11630013493
5. Borga, Lisa, “Real Assets: Defined along with types and examples,” FundsNet, 17 October 2022, “https://fundsnetservices.com/real-assets”

Disclosures:

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.