The stock market in the US is at an all-time high, while the FTSE, according to the Financial Times, beat its 2018 high in February this year. This being the case, why would anyone invest in ‘real assets’ instead of in shares or bonds?
The answer is simple: markets go up and markets go down. Companies can fail and when they do, it is possible for their stock price to hit actual zero. If real assets, which include tangible assets such as agriculture, real estate, infrastructure and natural resources such as woodlands, hit zero, we’ll have a lot more than our pensions to worry about.
In normal circumstances, real assets retain their value, albeit with minor blips. This is why they are seen by many wealth managers as a useful hedge against inflation and against extreme market fluctuations. Real assets also have the advantage of generating very predictable if largely unexciting revenue streams.
Importantly, to take advantage of these desirable characteristics of real assets, it is not necessary for investors to actually buy land or forests or get involved in complex project financing schemes for bridges, tunnels or other types of infrastructure. There are funds that specialise in building portfolios of these assets, and investors can simply buy units or shares in those funds.
They then benefit from the underlying gains in the portfolio. Unlike shares, where the gain in the share price is linked to the company’s performance, or expectations about its performance, with real assets the gains are linked to the underlying physical characteristics and attributes of whatever the real asset is. So, for example, a real asset fund which specialises in, say building a portfolio of rental accommodation assets, or student hostels, has both a rental income stream and an appreciating property value component to the portfolio.
You can see clearly that this kind of fund is not going to be particularly vulnerable to the ups and downs of this or that stock market. The downside to investing in real assets, which is why you’d have to look long and hard to find a wealth manager who would advise a client to put most of their funds into real assets, is that they can be less liquid than stocks.