With inflation re-entering the lexicon in recent months, renewed attention has been placed on real assets. Long lauded for both their inflation protection and diversification benefits, real assets have, at their core, existed to build and power our nations and economies. The onset of COVID-19 served as an accelerant to existing multi-year trends, including increased adoption of technology by consumers and businesses, rising demand for sustainable energy, a renewed focused on public health and equal access to a safe and reliable food supply. We believe these long-term, secular trends will drive economic growth in the coming years and create a massive investment opportunity in traditional and “next generation” real assets.
- Investors have traditionally turned to real assets for potential inflation protection, income and diversification. But at their core, real assets have existed to build and power our nations and economies.
- We believe that the onset of COVID-19 accelerated certain multi-year trends that will drive economic growth in the coming years and represent a massive investment opportunity set.
- In our view, a well-designed real assets portfolio incorporates both traditional and “next generation” real assets.
Real assets are physical or tangible assets that you can touch or hold—a building, railroad or a bar of gold. They have intrinsic value thanks to their physical attributes. This compares to financial assets, such as stocks and bonds, which derive their value from a contractual claim on or interest in an underlying asset (e.g., debt or equity of a company).
Traditional real assets are often divided into four main categories: real estate, commodities, energy and infrastructure. Real estate is land, or anything permanently affixed to it, such as office buildings, houses, apartments, or retail stores. Commodities are basic goods or raw materials and have intrinsic value on their own and may also be used as inputs into manufacturing processes. Examples include precious metals, agriculture products like wheat or coffee, and natural resources, such as oil and natural gas. Energy encompasses elements of the broader ecosystem, such as utilities or midstream companies engaged in the transportation, storage and processing of the raw energy commodities. Infrastructure refers to the physical assets and networks that transport, store and distribute goods, energy, people and information. Examples include airports, toll roads and cell towers.
We’ll spend much of the paper discussing the evolving opportunity set in real assets driven by the secular themes noted above. But let’s start by revisiting the investment merits of traditional real assets.