With stocks and bonds facing the prospect of uncertain returns, many trustees and providers are looking to enhance diversification in defined contribution schemes. We believe liquid real assets — including real estate securities, commodities, natural resource equities and listed infrastructure — offer an attractive way to fill that diversification need, particularly as the market pivots away from quantitative easing and low interest rates to a policy-induced reflationary environment.
Will DC schemes embrace real assets? Listed real assets remain significantly under-represented in U.K. defined contribution (DC) schemes compared with the sizable allocations in most defined benefit pension plans. However, over time we expect this to change as innovative new funds make it easier for DC schemes to diversify beyond traditional equities and fixed income.
What’s real is real. Tangible real assets have been an increasing focus for investors looking to diversify beyond traditional equities and fixed income. However, there is often a misconception that private, illiquid investments are the only “real” way to allocate to real assets. This has had the effect of leaving most DC investors underallocated due to the cost, liquidity and complexity challenges of implementing private-market strategies in DC schemes. Even among the few DC schemes that have managed to establish a real assets allocation, few have implemented a well-diversified real assets program and therefore miss out on some of the most compelling characteristics of the asset class.
Ease of access. Listed markets can reduce barriers to access so significantly that investors of any size can establish a broadly diversified real assets allocation — diversified globally and by real asset category (real estate, infrastructure, commodities, resource enterprises, etc.). Diversifying in this way may help to balance the inherent tradeoffs of individual real asset categories and has historically offered attractive full-cycle returns, diversifying performance patterns and positive sensitivity to unexpected inflation.
Benefits of the blend. Individually, each of the above attributes has merit, but together they can offer tremendous utility to investors that are concentrated in traditional equities and fixed income, helping to maintain or potentially enhance portfolio returns while reducing risk.