On solid ground: foundations of real assets investing

Ranging from rail to regulated utility, senior housing to data centers, real assets across infrastructure and commercial real estate are the backbone for economic development – spurring growing global demand for these assets. Listed real assets may provide a multitude of benefits to an investor’s portfolio, including diversification, inflation hedging and a nontraditional source of income.

What are real assets?

Broadly, real assets provide the framework and resources to facilitate everyday activity in the world economy. While numerous types of investments could be considered real assets, our definition includes:

• Real estate, including real estate investment trusts (REITs). Land and commercial properties including apartments, self-storage, warehouses, data centers, etc.
• Infrastructure. Assets and networks used to transport, store and distribute goods, energy, people and information, such as toll roads, pipelines, airports and cellphone towers.
• Commodities. Basic goods such as oil, natural gas, precious metals, gold, corn and soybeans.

Unlike conventional stocks and bonds, the value of listed real asset investments comes from the physical nature of their underlying assets. This direct link to hard assets means real assets often store long-term value better than more traditional investments. Their intrinsic value may increase due to higher utilization, greater demand or scarcity of supply.

Listed real assets offer enhanced income and a higher degree of earnings visibility than traditional public equities, which makes them an attractive way to extend portfolio duration when short-term yields are declining.

Listed real assets offer a multitude of benefits

While the inherent characteristics of each real asset can vary, they have several features in common, including improving diversification (Figure 1), hedging inflation (Figure 2) and generating income (Figure 3).

Macro factors and monetary policy create an attractive entry point

Pandemic-era economic lockdowns followed by a historically rapid central bank tightening cycle served as stiff headwinds for infrastructure and commercial real estate. This is due to the duration of their cash flows, higher use of leverage compared to broader equities, and growth that relies heavily on the physical movement of people.

While this environment was challenging, relative underperformance was driven largely by sentiment and multiple compression, as unwavering negative investor sentiment outweighed impressive earnings growth.

Furthermore, the attractive yields that had been a calling card for listed real assets investors were suddenly overlooked. Rising rates and an inverted yield curve made cash one of the most attractive risk-adjusted investment options of the past two years.

However, the challenging macro backdrop over the past five years set the stage for an attractive entry point into these asset classes (Figure 4).

The third quarter serves as a blueprint

History provides many examples to support this trend, most recently the third quarter of 2024. Market expectations for the direction of monetary policy shifted significantly, especially in the United States. The U.S. Federal Reserve kicked off its highly anticipated loosening cycle in September with an outsized 50 basis point cut to the target rate, due in part to downside surprises for U.S. labor markets.

However, before rate cuts started, markets began rewarding the relative laggards of the first half of 2024, namely interest rate sensitive and defensive areas of equity markets (Figure 5).

An inflection point for listed infrastructure and real estate securities occurred at the beginning of the third quarter. In fact, utilities and real estate were the top two performing GICS sectors in Q3. Similarly, these asset classes have shown competitive performance with most other equity groups over the last 20 years.

A clear path forward

Listed real assets are uniquely positioned to continue their outperformance during this rate cutting cycle. Several factors bode well for the nearto intermediate-term outlook, including a history of strong returns through periods of falling rates, secular trends such as housing supply/affordability and the demand for energy.

Furthermore, broad positioning within listed real assets remains light. Paired with either attractive valuations or multiple expansion aided by lower rates (Figure 6), we believe now is an opportune time for investors to consider allocating to listed real assets.

Consider income-producing real assets

Historically, income-producing real assets such as infrastructure and real estate have supplied competitive total return and positive inflation hedging effects, with lower correlations to more traditional stocks and bonds. These asset classes have also provided convincing yields, helping investors diversify their income sources. For these reasons, we feel income-producing real assets should be an important part of a balanced portfolio.