Inflation—and, more importantly, inflation surprises—climbed to a 40- year high at the end of 2021, driven by global supply chain issues. This environment has persisted, amplified by unexpectedly strong wage inflation and further commodity supply shocks stemming from the war in Ukraine and subsequent economic sanctions leveled against Russia.

The one factor common to all real assets is their positive sensitivity to inflation surprises. The reason for this is simple: inflation often affects both asset prices and revenues of real assets, either directly through contractual inflation linkages or indirectly through fundamental economic drivers. This ability of real assets to counter inflation offers potential benefits to portfolios both in the short term, as prices climb, and in the longer term, should inflation rates continue to surprise to the upside.

The result of these inflation relationships has historically been strong returns in environments of rising and unexpected inflation, whether looking at individual real assets categories or a diversified real assets blend (Exhibit 1).

Average annual real returns in periods of rising and unexpected inflation
June 1991–March 2022

At March 31, 2022. Source: Barclays, Bloomberg, Dow Jones, FTSE, S&P, Refinitiv Datastream, Cohen & Steers.
Past performance is no guarantee of future results. Inflation measured as the year-over-year change in the Consumer Price Index for all urban consumers, published by the U.S. Bureau of Labor Statistics. Rising inflation is measured as a positive year-over-year increase in the 12-month inflation rate. Unexpected inflation measured as a positive difference between the year-over-year realized inflation rate and lagged 1-year-ahead expected inflation, as measured by the University of Michigan survey of 1-year-ahead inflation expectations. The real assets blend is not representative of an actual portfolio and is for illustrative purposes only. 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.

The goal of portfolio diversification is to own asset classes that tend to experience their above- and below-average returns in different economic and market environments—when one asset zigs, the expectation is that another will zag. Real assets’ distinct economic sensitivities tend to differentiate them from traditional risk assets such as stocks and bonds.

The historical benefits of these differentiated economic drivers can be seen in real assets’ “beta,” i.e., their sensitivity to the broad global equity market (Exhibit 2). A beta of more than 1 indicates that the asset class (over the timeframe being analyzed) exhibits more volatility than the broad equity market. A beta of less than 1 indicates that the asset class tends to behave differently or be less volatile than the market. In this case, the low market beta of real assets suggests significant diversification potential, which may help to reduce portfolio volatility—and, we believe, improve risk-adjusted returns.

At March 31, 2022. Source: Barclays, Bloomberg, Dow Jones, FTSE, S&P, Refinitiv Datastream and Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers. 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 will begin. Beta measures the relative volatility of an investment as compared to a standard market index. A market index will always be equal to 1.00. An investment with a higher/lower Beta, more/less than 1.00, is more/less volatile than the market index. See end notes for index associations, definitions and additional disclosures.

Real assets have historically generated strong returns over full market cycles, with all but commodities delivering performance in line with or better than global stocks over the past 30 years (Exhibit 3). The long-term average for commodities was depressed by a decade-long bear market from 2008 to 2018, driven by the perfect-storm anomaly of (1) China’s orchestrated downshift in demand, (2) significant technological advances in oil and gas drilling, and (3) a decade of low interest rates and cheap access to capital— all of which drove a prolonged commodity oversupply cycle. However, commodities have since experienced substantial improvements in supply/ demand fundamentals, including strong global post-Covid reopening demand, tight inventories and a more supportive macroeconomic backdrop, providing potential catalysts for a sustained multi-year recovery.

The results below also demonstrate the potential benefits of combining multiple real assets within a single portfolio. Individual real assets categories can be quite volatile. However, combined into one strategy, a diversified real assets blend has historically delivered competitive returns with significantly less volatility than global stocks, capitalizing on diversification benefits available within and among the different categories.

Annualized nominal returns and risk
June 1991–March 2022

At March 31, 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.

The 2010s were characterized by repeated and unprecedented disinflation surprises, which weighed on real assets returns even as the broad equities market climbed ever higher. This has resulted in historically attractive real assets valuations relative to equities—even after the group’s strong returns since 2021 (Exhibit 4).

We believe today’s low relative prices are just one reason why the recovery in real assets may still have a long runway. Catalysts for a multi-year period of outperformance include:

• Supply shortages across labor, product and commodity markets continue to impact inflation dynamics, with supply-side discipline in commodities production expected to persist.
• The combination of elevated public spending, peak globalization and the “war on inequality” may sustain higher inflation over the coming decade, potentially weighing on stock and bond returns.
• Central banks are likely to tighten financial conditions into slowing economic growth. Real assets typically outperform traditional stocks and bonds during “stagflationary” periods of lower-than-expected growth and higher-than-expected inflation.

Valuations vs. global equities
January 2000–March 2022

At March 31, 2022. Source: Bloomberg, S&P Xpressfeed, Cohen & Steers proprietary analysis.
Past performance is no guarantee of future results. Valuation scores represent composites of various metrics: global equities/infrastructure/ resource equities: cashflow-to-price, dividend yield and book-to-price; real estate: FFO-to-price, dividend yield and book-to-price; commodities: weighted real spot price. Real estate, infrastructure and resource equities based on proprietary Cohen & Steers data for respective stock universes, constructed from the S&P Global Xpressfeed database. Global equities represented by Datastream World Index. Commodities represented by Bloomberg Commodity Index. 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. 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. See end notes for index definitions and additional disclosures.

Individually, real assets have merit; together, in a diversified framework, a strategic allocation in real assets can offer tremendous utility to investors who are concentrated in traditional equities and fixed income (Exhibit 5).

History shows that including real assets in a portfolio may provide key benefits, including the potential for:

• Inflation sensitivity
• Greater portfolio diversification
• Attractive risk-adjusted returns over full market cycles

Moreover, real assets currently trade at attractive valuations relative to equities. We believe this combination of potential inflation benefits, diversification and relative value represents a compelling opportunity to realign portfolios to take advantage of what real assets can offer.

At March 31, 2022. Based on Cohen & Steers analysis and expectations.
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 will begin. See end notes for index associations, definitions and additional disclosures.

Although every investor’s needs are different and there are many ways to make an allocation to listed real assets, Cohen & Steers offers a multi-strategy solution that we believe may effectively address the three objectives of inflation protection, diversification and long-term return potential.

Our unique approach is grounded in active management. Bottom-up fundamental analysis is combined with dynamic top-down asset allocation to further enhance potential returns. Risk management is an ever-present part of the equation, and we generally seek exposure to additional diversifiers (e.g., smaller allocations to gold and short-duration fixed income) to help further manage portfolio risk over time.

This approach allows investors to implement a well-diversified allocation to real assets through a single holding, managed by specialists with a deep understanding of the asset classes.