Real assets investments began their surge in popularity earlier this year as investors searched for an inflation hedge.
While now – with inflation at a decades-high level – is a particularly inopportune time to be underexposed to real assets, the asset class is a vital component of a well-diversified portfolio and should be thought of as a long-term play, through all market conditions.
An allocation to real assets can play an important role in a portfolio by providing income, inflation protection, and diversification from equities and bonds. The latter is particularly relevant as U.S. equity correlations are at an extreme compared to historical norms, regardless of the current market conditions and inflation, according to S&P Dow Jones Indices.
Real assets have historically exhibited a lower correlation to equities and bonds, as well as other real assets. Investors may benefit from greater diversification by expanding into asset classes with lower correlations as the performance drivers for the asset class differ from other types of securities.
Real assets are a great way to augment a portfolio for better support during inflationary periods, however, it’s better to have them in a portfolio before inflation becomes a mainstream issue. Real assets have historically exhibited a greater ability to hedge inflation than the broader equity and fixed income markets, with the asset class generally offering stronger returns during periods when inflation is rising.
The FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR) may be an ideal fit for investors seeking the portfolio and income diversification potential of an expanded definition of real assets.
Some natural resources strategies can lead to over-concentration in industries such as energy and metals, but GUNR offers enhanced exposure to three sectors that may be overlooked: agriculture, timber, and water.
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