Real asset stocks can better diversify the portfolio

Real estate, infrastructure, commodity stocks can offer attractive payouts and better diversification.
Smart management of listed real assets can deliver returns in any economic phase.
Inflation-indexed bonds can contribute as a capital preservation component.

4 minutes reading time

As early as the 1950s, the US Nobel Prize winner Harry M. Markowitz showed that diversifying different assets in a portfolio can lead to a better ratio of return to risk. Real assets, for example, offer one way of diversifying the investment. Besides direct investments in real assets such as infrastructure, real estate, commodities and precious metals, these are primarily investments in the shares of companies active in these sectors. "By mixing the asset classes and weighting them accordingly in the portfolio based on the macroeconomic environment, there is a chance to generate attractive and solid returns over the long term," says John Vojticek, Head and CIO of Liquid Real Assets at DWS, who has been involved with investments in real assets for more than two decades.

The fact that real asset shares offer a diversification effect can be well demonstrated by the historical performance in different market phases. While global equities (as indicated by global equity indices such as the MSCI World) closed 2017 down by an average of six percent, infrastructure stocks, for example, rose by two percent. In 2021, global real estate stocks again outperformed the global equity market.^[1]

The fact that the performance of real estate, infrastructure and commodity shares can always clearly decouple from the overall market is also due to their comparatively low weighting in global share indices such as the MSCI World. "An already broadly positioned equity portfolio can therefore be even better diversified with such stocks," explains Matthias Meyer Global Head of Product Specialists & Development Alternatives at DWS.

Real assets stocks have some of the highest payout ratios

But there is another special feature that distinguishes real assets stocks: Historically, they have often had the highest payout ratios compared to global equities and bonds. Infrastructure and real estate shares in particular offer well-predictable income due to mostly long-term rental and utilization contracts. "This means that from the diversification effect and the solid returns of real asset shares, a better risk-reward profile for a portfolio can result in the long term," says DWS expert Meyer.

Real asset stocks can make the portfolio more robust through diversification and solid returns.

However, it is important to bear in mind that the individual sectors can develop differently depending on the economic phase. "Our experience shows, for example, that the returns of real estate stocks historically perform particularly well in relation to other asset classes when economic growth is high and inflation is low," Vojticek continues. Infrastructure stocks, on the other hand, do well in almost any economic environment - even if their performance has been particularly good in phases of strong economic growth so far. The basis is the historical performance of the fund components in the scenarios.

The right allocation depending on the economic environment

Depending on economic growth and inflation, real estate, infrastructure and commodity stocks as well as gold and inflation-indexed bonds perform very differently.

_{Source: Bloomberg and DWS International GmbH for the period from 31.12.02 to 31.12.22. Equity index returns including reinvestment of all distributions. Index returns before fees and expenses; it is not possible to invest directly in an index. For more detailed index definitions, please refer to the disclosures at the end of the presentation. For illustrative purposes only. For the representation of the individual asset classes, please refer to the disclosures.}

Depending on how economic growth and inflation develop, different real assets can be beneficial.

Gold can further strengthen the portfolio

Commodity stocks also benefit when the economy is doing well, as demand for industrial metals or energy sources is particularly strong then. However, they can often also perform well in an environment of rising prices, i.e. inflation. "With a cleverly diversified investment between real estate, infrastructure and commodity stocks, positive return opportunities can therefore also be generated for different macroeconomic environments," concludes DWS expert John Vojticek.

When it comes to commodities, investments in gold are also a good option. In the past, the precious metal has shown an exceptionally low correlation to global equities as well as to real estate and infrastructure stocks - viewed over five-year periods. Thus, investments in gold can contribute to a lower volatility of the overall portfolio, especially during turbulent stock market phases.

To offset inflation, inflation-indexed bonds can complement real assets well

„Another useful addition in a real asset-focused multi-asset portfolio are bonds that are linked to inflation - even though they are not real assets," argues John Vojticek. Their special feature: the interest payments and the redemption rates of these inflation-indexed bonds are linked to the consumer price index. In the event of rising inflation, such an investment thus maintains its real value for the investor. This admixture can thus be advantageous, for example, in times of low economic growth and high inflation rates - phases in which real asset classes can potentially perform less well. The risks of real assets must be taken into account. Infrastructure assets are subject to particular risks due to government actions, changes in infrastructure-specific regulation, as well as political events and forces of nature. Real estate is subject to country-specific, economic and political conditions. Vacancies, tenant insolvencies, declining location quality, declining demand for space can lead to falling rental income and have a negative impact on development. Shares in real estate companies are thus subject to a particular risk. Commodity-dependent investments are subject to significant fluctuations and are influenced to an above-average extent by (currency-) political, economic, financial or natural events, among other things. Inflation-indexed bonds are exposed to a creditworthiness risk and an interest rate risk.