Many DC plan professionals are reevaluating portfolio allocations amid mounting wage pressures, supply chain disruptions and commodity price shocks—conditions for which real assets are historically well suited.
KEY TAKEAWAYS
- Drivers of the current business cycle, including anti-globalization forces and insufficient aggregate supply, point to enduring inflation.
- Real assets historically have provided important allocation benefits such as inflation sensitivity, portfolio diversification and attractive risk-adjusted returns.
- DC plan participants can achieve a level of inflation defense with allocations to real estate, infrastructure or a real assets multi-strategy solution.
Inflation likely to remain higher for longer
Inflation is surging for the first time in decades, and evidence is mounting that the spike in prices is more than temporary. A major shift in the drivers of this business cycle vs. prior expansions points to enduring inflation and a prolonged environment favorable for real assets.
In the last economic cycle, the slow and shallow recovery following the global financial crisis was characterized by deflationary globalization forces and insufficient aggregate demand (due to deleveraging in the private sector).
Consequently, core inflation in the Organization for Economic Cooperation and Development averaged just 1.8% annually between 2010 and 2020.
In contrast, this cycle has seen a rapid recovery from the Covid pandemic due to inflationary “peak globalization” forces and an over-stimulated private sector. Unprecedented consumer savings and pent-up demand are expected to support continued (albeit slowing) economic growth and business demand. At the same time, tight labor markets and impaired supply chains are driving inflationary pressures. Moreover, the longer the Russia–Ukraine war continues, the higher the likelihood that supply disruptions will endure. We believe this convergence of supply and demand pressures will result in inflation staying well above the previous-cycle average (Exhibit 1).
EXHIBIT 1
Inflation is high and broad-based
At April 30, 2022. Source: Refinitiv Datastream, Cohen & Steers.
Past performance is no guarantee of future results. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Core inflation is a measure of inflation that excludes certain items that face volatile price movements because, in determining the legitimate long-run inflation, short-term price volatility and transitory changes in price must be removed. Core inflation is most often calculated using the consumer price index (CPI), which eliminates products—usually those in the energy and food sectors—that can have temporary price shocks; these shocks can diverge from the overall trend of inflation and give a false measure of inflation. Headline inflation reflects the long-term trend in a particular price level, but it does not exclude any items that face volatile price movements. See end notes for additional disclosures.
As today’s strong demand and impaired supply point to persistent inflation forces, investors may want to consider real assets, which often have built-in inflation escalators or may benefit directly from rising commodity prices.
The benefits of real assets in DC plans
An allocation to listed real assets provides access to a large investment universe which is distinct from global equities and offers at least three effective ways to improve potential portfolio outcomes.
Inflation sensitivity
Real assets’ economic drivers are often directly or indirectly tied to inflationary trends, historically resulting in outsized returns when inflation exceeds expectations. An allocation to real assets may help preserve future purchasing power, potentially offsetting the weak or even negative inflation sensitivity of traditional portfolios concentrated in stocks and bonds.
Diversification potential
Low correlations to traditional asset classes mean real assets may enhance portfolio diversification. That can be a valuable characteristic when the outlook for stocks and bonds is uncertain—as it is today, with stocks trading near record highs and rising interest rates weighing on fixed income investments.
Attractive risk-adjusted returns
Real assets have historically delivered attractive full-cycle returns that can potentially improve risk-adjusted portfolio returns without sacrificing growth potential. Over the last 30 years, a blend of real assets has exhibited a similar Sharpe ratio to global stocks, but with lower volatility (Exhibit 2).
EXHIBIT 2
Real assets may improve risk-adjusted performance
At April 30, 2022. Source: Barclays, Bloomberg, Dow Jones, FTSE, S&P, Refinitiv Datastream, Cohen & Steers.
Past performance is no guarantee of future results. Return reflects compound annualized return. Risk reflects annualized standard deviation of monthly returns. Standard deviation, also known as historical volatility, is a measure of the dispersion of a set of data from its mean and is used by investors as a gauge for the amount of expected volatility. Sharpe ratio is a measure of risk-adjusted return, calculated by subtracting the risk-free rate from a return and dividing that result by the standard deviation. The higher the Sharpe ratio, the higher the risk-adjusted return. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. See end notes for index associations, definitions and additional disclosures.
3 Solutions for fighting inflation
The 60/40 stock-and-bond portfolio may not meet expectations for many DC plan participants going forward. Recent market performance and the likelihood that inflation will persist suggest that traditional, style-box-driven 401(k) options may struggle to defend against inflation—underscoring investors’ need for true diversification. We believe real assets should occupy a strategic allocation in DC plans, both for inflation sensitivity and diversification potential.
Below are three real assets funds managed by Cohen & Steers:
Why invest with us
Cohen & Steers is a world leader in liquid real assets and alternative income, with a global team of experienced investment professionals dedicated to understanding these complex and often inefficient markets. Founded in 1986, we have a strong track record of providing innovative diversification solutions and delivering results for our clients.
To learn more about real assets, visit cohenandsteers.com/insights.
FURTHER READING
The benefits of real assets in retirement plans
With the economic regime shift now underway potentially challenging for typical target-date fund allocations, many fiduciaries are exploring diversification options for retirement plans. Listed real assets may provide an attractive solution.
Three tax-smart income alternatives
Strategies with inherent tax efficiencies may help investors diversify sources of income and potentially keep more of what they earn.
Defending against sustained inflation with real assets
We believe markets have transitioned to a new regime of slow growth and elevated inflationary risks. It’s an environment we believe warrants diversification and inflation mitigation. And it’s precisely the role that we feel real assets can fulfill. Watch why we think we are in a period of secular stagflation and what role real assets can play.
Index definitions / Important disclosures
Diversification does not ensure a profit or protect against loss. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment.
Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers fund carefully before investing. A summary prospectus and prospectus containing this and other information may be obtained by visiting cohenandsteers.com or by calling 800 330 7348. Please read the summary prospectus and prospectus carefully before investing.
Real assets blend: 27.5% real estate, 27.5% commodities, 15% infrastructure, 15% resource equities, 10% short-duration fixed income and 5% gold. Real estate: Datastream Developed Real Estate Index through 2/28/05; FTSE EPRA/NAREIT Developed Index thereafter. The Datastream Developed Real Estate Index encompasses listed real estate companies in developed markets and is compiled by Refinitiv Datastream. The FTSE EPRA Nareit Developed Index is an unmanaged market- weighted total return index, which consists of many companies from developed markets that derive more than half of their revenue from property-related activities. Commodities: S&P GSCI Index through 7/31/98; the Bloomberg Commodity Total Return Index thereafter. The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Bloomberg Commodity Total Return Index is a broadly diversified index that tracks the commodity markets through exchange-traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. Infrastructure: 50/30/20 blend of Datastream World Gas, Water & Multi-Utilities, Datastream World Pipelines and Datastream World Railroads through 7/31/08; Dow Jones Brookfield Global Infrastructure Index thereafter. The Datastream World Index Series encompasses global indexes of companies in their respective sectors (World Gas, Water & Multi-Utilities; Materials; Oil & Gas; and Pipelines) and is compiled by Refinitiv Datastream. The Dow Jones Brookfield Global Infrastructure Index is a float-adjusted market-capitalization-weighted index that measures performance of globally domiciled companies that derive more than 70% of their cash flows from infrastructure lines of business. Resource equities: 50/50 Blend of Datastream World Oil & Gas and Datastream World Basic Materials through 5/31/08; S&P Global Natural Resources Index thereafter. The Datastream World Index Series encompasses global indexes of companies in their respective sectors (Datastream World Oil & Gas and Datastream World Basic Materials) compiled by Refinitiv Datastream. The S&P Global Natural Resources Index includes 90 of the largest publicly traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across three primary commodity-related sectors: Agribusiness, Energy and Metals & Mining. Short-duration fixed income: The ICE BofA 1–3 Year U.S. Corporate Index tracks the performance of USD-denominated investment-grade rated corporate debt publicly issued in the U.S. domestic market with a remaining term to maturity of less than 3 years. Gold: Gold spot price in USD per Troy ounce. Global stocks: MSCI World Index, a market-capitalization-weighted index consisting of a wide selection of stocks traded in 24 developed markets. U.S. Treasury bonds: The ICE BofA U.S. Treasury 7-10 Year Bond Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than 7 years and less than or equal to 10 years.
Data quoted represents past performance, which is no guarantee of future results. The views and opinions presented in this document are as of the date of publication and are subject to change. There is no guarantee that any market forecast set forth in this document will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Cohen & Steers does not provide investment, tax or legal advice. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing. No representation or warranty is made as to the efficacy of any strategy or fund or the actual returns that may be achieved. The views and opinions expressed are not necessarily those of any broker/dealer or its affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules or guidelines.
Risks of investing in real assets. Funds that primarily invest in securities in a specific sector may be subject to greater risk associated with issuers in that sector than a fund that is not primarily invested in one sector. A real assets strategy is subject to the risk that its asset allocations may not achieve the desired risk-return characteristic, underperform other similar investment strategies or cause an investor to lose money. The risks of investing in REITs are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies; declining rents resulting from economic, legal, tax, political or technological developments; lack of liquidity; limited diversification; and sensitivity to certain economic factors such as interest rate changes and market recessions. The market value of securities of natural resource companies may be affected by numerous factors, including events occurring in nature, inflationary pressures and international politics. Infrastructure businesses may be subject to regulation by various governmental authorities, such as rates charged to customers, operational or other mishaps, tariffs and changes in tax laws, regulatory policies and accounting standards. Foreign securities involve special risks, including currency fluctuation and lower liquidity. Because the strategy invests significantly in natural resource companies, there is the risk that the strategy will perform poorly during a downturn in the natural resource sector. The Fund must meet certain diversification requirements under the U.S. tax laws. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved. An investment in commodity-linked derivative instruments may be subject to greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity- linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. Among the risks presented are market risk, credit risk, counterparty risk, leverage risk and liquidity risk. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivatives.
Futures trading is volatile and highly leveraged and may be illiquid. Investments in commodity futures contracts and options on commodity futures contracts have a high degree of price variability and are subject to rapid and substantial price changes. Such investments could incur significant losses. There can be no assurance that the options strategy will be successful. The use of options on commodity futures contracts is to enhance risk-adjusted total returns. However, the use of options may not provide any, or may provide only partial, protection from market declines. The return performance of the commodity futures contracts may not parallel the performance of the commodities or indexes that serve as the basis for the options they buy or sell; this basis risk may reduce overall returns..
Cohen & Steers Capital Management, Inc., (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds. Cohen & Steers U.S. registered open-end funds are distributed by Cohen & Steers Securities, LLC, and are available only to U.S. residents.