Investors sticking with yesterday’s winners risk missing a reversal of fortunes.
Key takeaways
- Avoid the hindsight trap in portfolio allocations
FOMO (fear of missing out) all too often plays an element in portfolio construction. But focusing on what worked well in the past can be a recipe for disappointment. We anticipate material headwinds for the winners of the recent past. - Asset allocators are facing a historical inflection point
Equity markets increasingly depend on the fates of a handful of stocks, valuations are unappealing, and inflation risks could leave stock/bond correlations near 50-year highs. By contrast, return expectations in the new regime favor real assets. - Real assets offer investors distinctive portfolio benefits
Both history and recent experience attest to the distinctive diversification potential and inflation sensitivity of real assets. We believe the beneficial attributes of real assets warrant a strategic allocation in every portfolio.
Over the past few months, we have fielded a lot of questions about asset allocation and the role of real assets in portfolios. We’ve noticed that investors have a preference for broad equities and private assets, driven in part by recent experience.
However, when it comes to asset allocation and the tendency to stick with yesterday’s winners at the expense of tomorrow’s opportunities, we’d remind investors: We’ve seen this movie before.
Consider the last decade. Global equities delivered annual total returns of over ten percent with U.S. equities returning more than thirteen percent annually.
Private assets also saw impressive double-digit returns, while reporting extremely low volatility.
In contrast, listed real assets like Global Real Estate and Commodities returned less than two percent annually, while Global Infrastructure and Natural Resource Equities returned just under five percent.
EXHIBIT 1
Asset class performance often changes over time
10-year annualized return (ending in 2023)
At December 31, 2023.
Source: Burgiss, Barclays, Bloomberg, Dow Jones, FTSE, S&P, LSEG Datastream, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not represent 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 listed above. Standard deviation, which represents historical volatility, is a measure of the dispersion of a set of data from its mean and is used by investors as a gauge of the amount of expected volatility. See endnotes for index associations, definitions and additional disclosures.
With a decade of near-zero interest rates, fixed income was similarly challenged. Lack-luster bond performance was driven by the low starting point of rates following the global financial crisis and the sharp rise in interest rates since 2022.
Now consider the 10 years that ended in 2010. It’s a stark contrast.
During that decade, equity markets were the worst-performing asset class with barely positive total returns. Private markets were also substantially weaker—and registered higher volatility.
Conversely, U.S. Treasury returns and listed real assets were standout performers.
As you can see in this chart, assets that performed well between 2000 and 2010 fared worse in the last decade, and vice versa.
EXHIBIT 2
Asset class performance often changes over time
10-year annualized return (ending in 2023 and 2010)
At December 31, 2023.
Source: Burgiss, Barclays, Bloomberg, Dow Jones, FTSE, S&P, LSEG Datastream, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not represent 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 listed above. Standard deviation, which represents historical volatility, is a measure of the dispersion of a set of data from its mean and is used by investors as a gauge of the amount of expected volatility. See endnotes for index associations, definitions and additional disclosures.
It’s easy to become enamored with what has worked best recently. It’s challenging to resist FOMO, or the fear of missing out, which is why many investors tend to stick with what’s worked in the past, expecting it to work in the future.
But it’s common to see reversals of fortune. Returns are often mean reverting, with starting valuations being key to future performance.
And that leads me to today’s markets. Recent market leaders, including equities and private markets, now face more headwinds. Recent laggards, notably for our firm including real assets, have tailwinds.
Indeed, equity markets increasingly depend on the fate of a handful of stocks, which now make up more than 30% of the broad index. Valuations are at historically high levels and stock/bond correlations are near 50-year highs.
EXHIBIT 3
The 60/40 portfolio offers increasingly less diversification than in the past
At September 30, 2024. Source: Strategas Securities, LSEG Datastream, Bloomberg, Morningstar, Cohen & Steers.
Private markets may also struggle with higher interest rates impacting valuations and investment returns. Private equity investors may be unable to leverage their investments at ultra-low interest rates or to find favorable exits while tight credit spreads could challenge private credit.
In contrast, all core real assets categories are either neutrally or attractively valued and, we believe, positioned for meaningfully better returns compared to the last decade and other asset classes. Plus, real assets can enhance portfolio diversification and potentially mitigate the impacts of inflation.
EXHIBIT 4
Core real asset valuations appear more attractive than global equities
At December 31, 2024. Source UBS, Bloomberg, Citi Research – US Equity Strategy, Cohen & Steers.
We understand the pressures of FOMO, particularly, when so many investors haven’t experienced anything but a market environment in which rates were low, inflation was contained, and stock returns were so consistently strong.
But we know from our experience that allocating by looking in the rear-view mirror may be a recipe for poor future returns.
ABOUT THE AUTHORS
Jeffrey Palma, Senior Vice President, is Head of Multi-Asset Solutions, responsible for leading the firm’s asset allocation strategy and macroeconomic research.
FURTHER READING
3 Reasons to own real assets today
A diversified blend of real assets can potentially play a vital role in the new regime of higher inflation, higher rates and increased market volatility.
What could a second Trump presidency mean for real assets?
Market reaction indicates investors are expecting higher inflation, deregulation, lower taxes and winners and losers in key sectors such as energy and infrastructure.
The benefits of real assets in retirement plans
The economic regime shift now underway could prove challenging for typical allocations, and many fiduciaries are exploring diversification options for retirement plans. Listed real assets may provide an attractive solution.
Index Definitions and important disclosures
An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes.
Capital markets assumptions criteria and methodology
Inputs to these expectations include return, volatility, and correlation across asset classes. Assumptions are generally not updated on a real-time basis, therefore results may vary with each use and over time. All such expectations are subject to change. Yields on all markets are based on levels derived at year-end 2022. Expectations for returns are driven by a range of factors. Within fixed income, forecasts for interest rates are determined at various maturities based on economic growth, inflation, and policy expectations as well as factors such as the shape of the yield curve, the expected level of real interest rates and inflation breakevens, and credit spreads. These interest rates are used to compute expectations for total returns, accounting for the starting point of bond yields, capital gain/loss based on assumption of benchmark duration, and yield. Treasury bond returns are based on expectations for the level of inflation, the path of future short-term rates, and an expectation for the slope of the yield curve. Credit returns, including corporate, high yield and preferreds are based on expectations of fair value spread levels along with adjustments for historical downgrade and default risk through an economic cycle. For equities, including listed real assets, various factors contribute to total return expectations. Expectations are based on estimates for earnings growth and fair value multiples. Earnings growth expectations are driven by anticipated profitability and payout ratios, while valuation multiples are based on expected interest rates, risk premiums, and growth rates. Changes in valuations are driven by forecasts of interest rates, risk premiums, growth, and profitability. Dividend yield also contributes to total return. For commodities, we forecast investable returns on commodity total returns by coming up with expectations on index-level spot returns, roll returns, and collateral returns. Spot returns are a function of inflation and expectations of supply/ demand/inventory balances, roll returns are a function of the typical shape of the commodity futures curve, and collateral returns are a function of our forecast for short term interest rates. Volatility assumptions are driven by historical experience as well as expectations for changes related to growth, inflation, policy, etc. Volatility for private real estate is adjusted (per academic work by Geltner) to more accurately reflect economic volatility to correct for the autocorrelation/smoothing that exists in private RE returns. Correlations reflect historical correlations. Forward-looking volatility and correlation assumptions are based on historical outcomes. Volatility data use the full available data history available for each respective market. Correlation data use a common starting point. Future economic and market conditions could result in different experiences in coming years. Due to the illiquid nature of private real estate, private real estate returns generally exhibit a return pattern that understates the level of volatility that would be realized if assets were valued more frequently. We used a statistical adjustment [Geltner, David. 1993. “Estimating Market Values from Appraised Values Without Assuming”] to adjust for the first-order autocorrelation in the appraisal-based private real estate return series to arrive at an estimate that more accurately reflects the true volatility of private real estate returns for the time periods shown. This adjustment also is applied to calculations of private real estate correlation to other asset classes. Estimates are inherently uncertain and may not reflect actual outcomes. Utilizing different factors or assumptions in conducting the statistical analysis may result in materially different estimates than those shown. Investing in private real estate involves substantial risk, including entire loss of investment. Certain inputs into the capital market assumptions have been obtained from sources that Cohen & Steers believes to be reliable as of the date presented; however, Cohen & Steers cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content herein and inputs into the capital market assumptions are current as of the date of publishment (or such earlier date as referenced herein) and are subject to change without notice. Cohen & Steers does not make any express or implied warranties or representations as to the inputs into the capital market assumptions or the completeness or accuracy of its results.
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 12/31/1989; 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 consisting 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. Performance for the S&P GSCI Index prior to January 1991 is hypothetical back-tested, not actual performance, based on the index methodology in effect on the launch date and using actual historical constituent-level data to reconstruct the index’s returns. The Bloomberg Commodity Total Return Index, formerly known as the Dow Jones-UBS Commodity 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 the 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) and is 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 a 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 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. Private real estate: MSCI Closed-End Private Real Estate Index. Private infrastructure: MSCI Closed-End Private Infrastructure Index. Private credit: MSCI Closed-End Private Credit Index. Private equity: MSCI Closed-End Private Equity Index. The MSCI Private Capital Closed-End Fund Indexes aim to measure the net-of-fees aggregate performance in unlisted closed-end private capital fund vehicles. The fund-level transaction data used in constructing the indexes are sourced exclusively through MSCI limited partner (LP) clients, which are investing into the fund vehicles.
Data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated/referenced above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this commentary will be realized. The views and opinions in the preceding commentary are as of the date of publication and are subject to change. Diversification does not ensure a profit or guarantee to protect against loss. There is no guarantee that actively managed investments will outperform the broader market.
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 take into account the specific objectives or circumstances of any investor. We consider the information in this presentation 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. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing. 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.
Real assets risks. A real assets strategy is subject to the risk that its asset allocations may not achieve the desired risk/return characteristic, may underperform other similar investment strategies, or may cause an investor to lose money. The risks of investing in REITs are similar to those associated with direct investments in real estate. Property values may fall 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. Global infrastructure securities 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. 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. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved. 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.
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