Harnessing private real assets to improve the risk-adjusted returns of portfolios

08 Feb

Executive summary

Recent periods of heightened market volatility — often combined with subpar stock and bond performance — have prompted institutional investors to consider alternatives, such as real assets.

Private investments in relatively illiquid categories of real assets — farmland, timberland and commercial real estate — have exhibited low or negative correlations to stocks and bonds, diversifying portfolio risk. For the past two decades, real assets have generated higher returns than traditional investments, with significantly lower volatility.

Portfolio optimization using 21 years of returns demonstrated private real assets’ potential to improve the risk-adjusted returns of portfolios consisting of stocks and bonds, and diversify risks associated with publicly traded commodities and REITS.

Results supported combining multiple categories of real assets and constraining overall allocations within practical limits, such as 10% or 20%. Allocation limits are necessary to address limited availability of farmland and timberland, index data limitations, and investor liquidity needs.


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Posted by on February 8, 2014 in Investments


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