Investors who are seeking ways to enhance a traditional portfolio mix should consider real asset opportunities and how exposure to infrastructure, natural resources and real estate ETFs can provide a more diversified market exposure.
In the recent webcast, Real Asset Insights – Why Investors Should Re-Think Their Positioning in Real Assets, Mark Carlson, Senior Investment Strategist, FlexShares Exchange Traded Funds, argued that investors should re-think their positioning in real assets. Specifically, investors should incorporate natural resources, infrastructure and real estate assets.
Natural resources cover energy, metals, agriculture, timber and water. They provide exposure to the basic economic building blocks, capitalize on supply and demand dynamics, and benefit from short- and long-term inflation drivers. Carlson pointed out that global populations and living standards are increasing, driving up the collective demand for goods. Additionally, we see that there is a widespread need for global infrastructure development and repair, which require natural resource consumption.
Consequently, global markets are potentially in the early stages of what could be an extended period of demand expansion for natural resources, or the the materials that drive expanding economies. Natural resource equities could present a way to invest in commodities without physically owning commodities or purchasing commodity futures. This sector can provide access to investments in water, timber, and other resources that are unavailable via futures contracts.
Investors can gain exposure to natural resources through something like the FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR). The FlexShares global natural resources strategy takes an “upstream” focus that targets companies with ownership or direct access to the raw materials. These natural resource companies have revenues, earnings, cash flows, and valuations that are closer linked to natural resources. The upstream focus provides improved correlation to commodity futures compared to downstream operations, granting investments greater inflation protection.
Infrastructure includes areas like transportation, energy and data communications. Carlson explained that investors should think movement as these real assets cover long-lived, hard assets with high barriers of entry. There is a critical need for infrastructure upgrades across Developed Markets, along with high demand for new infrastructure to meet rapidly growing middle class in Emerging Markets. The FlexShares strategy focuses on global infrastructure which is dominated by already built infrastructure and these tend to be mature projects characterized by stable cash flows with a greater correlation to inflation than Emerging Markets.
The infrastructure sector also has the potential for income diversification. Infrastructure ETFs, such as the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA), offer investors sound fundamentals and above-average dividend yields, making the asset class appealing in the current market environment. The FlexShares methodology also benefits from the expansion of the traditional infrastructure framework to take advantage of the evolving infrastructure space and gain access to wireless towers, data centers and governments outsourced services.
Lastly, real estate or industrial, commercial and residential buildings are assets that tied to increase in value as costs rise. Historically, there has been potential for long term capital appreciation. They also generate revenue streams that can rise with economic activity, population and inflation, providing investors with a yield-oriented investment or income-producing asset class.
The FlexShares Global Quality Real Estate Index Fund (NYSEArca: GQRE) targets the Northern Trust Global Quality Real Estate Index, a fundamentally-weighted index that focuses on commercial and residential REITs. FlexShares focuses on quality real estate, which has historically shown a very low correlation to traditional risk-based factors (value, size, yield) and tends to smooth out the factor cycle, potentially improving performance and mitigating drawdown when other factors are out of favor.
Financial advisors who are interested in learning more about real asset investments can watch the webcast here on demand.