AGF Investments portfolio managers put the case for real assets due to stronger stocks and bonds correlation
Relying on stocks and bonds for portfolio diversification would seem to be a flawed strategy right now as the correlation between the two asset classes becomes closer.
This boosts the case for investors and their advisors to seek other ways to achieve diversification in an era of higher interest rates than we have become used to.
A market perspective from two portfolio managers (PMs) at AGF Investments lays out compelling reasons for looking at assets such as real estate, commodities, and infrastructure.
Steve Bonnyman, director of equity research, VP and PM; and Jeff Kay, VP and PM; talk of the possible requirement to introduce less correlated assets than stocks and bonds into a balanced portfolio.
They highlight that real assets as with other investment comes with risk as well as potential for returns, but they can improve risk/return profiles.
Historically, these assets have “enhanced exposure to traditional assets by providing diversification, increasing yield and mitigating the risk of inflation in the portfolio,” the PMs state.
Bonnyman and Kay favour an actively-managed broadly diversified real asset strategy for its ability to often rebalance among the asset classes it invests in to maximize the risk/reward profile; for its higher likelihood of diversification among sectors compared to a sector-focused strategy; and for allowing investors to focus on their core portfolio rather than taking risks on smaller real asset sectors.
The PMs also note that real assets are a critical part of some major current investment themes.
These include inflation, where real assets (especially commodities and real estate) have proved to be successful hedges; AI, due to increased demand for data centres; green energy transition; decarbonization requiring commodities for new vehicles and energy generation; hydrogen economy; and re-shoring of manufacturing from Asia, requiring construction of factories and other infrastructure.
The correct mix of real assets therefore has potential for returns, diversification, and protection from inflation.