What are real assets?

Real assets are tangible and physical assets that typically come early in the supply chain and derive their value from contractual rights or ownership claims. That is why our Real Assets Portfolio will have a focus on resilient companies that have a stable cash flow. 

In this article, we are breaking down the definition of real assets and their potential benefits to an investor for the long term. 

Primary categories of real assets

• Real estate: Physical property such as land or buildings that are leased to tenants in order to generate regular cash flow. Examples include apartments, office spaces, warehouses, retail stores, and malls.
• Natural resources equities: Companies that are involved in the production, extraction, or processing of commodities and natural resources.
• Infrastructure: Infrastructure refers to physical systems and structures essential for the functioning of a society or enterprise. Examples include airports, toll roads, bridges and power plants. Infrastructure can be broadly categorised into economic and social infrastructure. 
• Commodities: Raw materials or primary agricultural products that can be bought and sold, such as gold, oil and copper.

Benefits of real assets in a portfolio

Incorporating real assets into a portfolio offers significant benefits, particularly in today's environment of higher inflation, higher rates, higher macro volatility, and higher geopolitical instability. Using the Endowus Real Assets Portfolio as an example, we break down the benefits. 

1. Diversification potential

Real assets typically exhibit a lower correlation with traditional asset classes such as equities, and bonds. 

This could mean that when equities or fixed income markets are underperforming, real assets may behave differently and could provide a stabilising effect on the overall portfolio. 

In particular, infrastructure and real estate are appealing due to their ability to generate stable yields through contractual cash flows. 

These assets often operate in monopolistic markets, ensuring a consistent income stream from fees associated with long-term contracts, leases, or concessions.  

The distinct economic drivers behind real assets contribute to their diversification benefits, which can help provide stability and reduce overall portfolio volatility. 

2. Return potential

Over longer periods, real assets have demonstrated competitive returns compared to traditional asset classes. 

Exposure to real assets can generate a consistent income stream for investors, regardless of the economic environment or short-term market fluctuations. In addition, real assets may outperform during periods of higher “nominal” economic growth (or the economic growth rate before being adjusted for inflation).

3. Higher inflation sensitivity

Real assets are known for their ability to perform well during inflationary periods. They often increase in value alongside inflation, as their prices can rise due to higher demand for tangible goods and services. This characteristic can help protect portfolios from the erosive effects of inflation on purchasing power. 

The inflation sensitivity comes largely from the pricing power of the underlying assets. During inflationary periods, inelastic demand from customers for many real assets means those customers must typically absorb subsequent price increases. 

If actual inflation matches expected inflation, many traditional assets whose prices reflect expected inflation should adequately compensate investors for inflation risk.  However, if actual inflation diverges from expected inflation (Unexpected Inflation), then real assets whose performance tracks actual inflation may provide a better inflation hedge. In both situations, the real assets components have performed well in rising and unexpected inflation. 

Not all real asets categories are created equal 

Not all real assets categories provide the same benefits in a portfolio and therefore it will not be appropriate to have a portfolio split equally between the different categories. 

The diagram below highlights the key qualities and how they relate to the 4 different types of real assets and the new Endowus Real Assets Portfolio.

Your portfolio needs an inflation-resilient element

Based on our analysis, we have found that if the long-term trend inflation rate rises from 1% to 3%, it will result in a significant decline of 45.8% in retirement savings over a period of thirty years. 

To put it into perspective, a 1% annual inflation rate will lead to a 26% decrease in purchasing power over the course of 30 years. 

Worse still, if the inflation rate reaches 3%, the reduction in purchasing power will be even more substantial, almost 60%.

Protect your portfolio from long-term inflation

Diversify your portfolio and enjoy inflation protection with the Endowus Real Assets Portfolio. The key aspect of the Real Assets Portfolio is its ability to serve as a satellite allocation, one that is complementary to a core allocation like the Endowus Flagship Portfolios. Each of the underlying funds does not have major overlaps with the global equity proxy and among themselves as well. The inclusion of various real assets categories has led to a lower maximum drawdown. 

Endowus has a private wealth arm that provides access to private real estate and infrastructure assets, along with other alternative assets. With Endowus Private Wealth, clients looking to invest a minimum of S$1 million in assets across our services can gain exclusive access to more personalised solutions and products.

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Read more: 

• Introducing Endowus Real Assets Portfolio
• Is this the right time to buy S-REITs?
• Understanding infrastructure equity and debt investments