Want Income, Diversification and an Inflation Fix? Some Advisors Are Turning to Real Assets

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Interest in real assets is rising, whether investors are concerned about inflation or see it as a way to diversify away from heavily concentrated stock indexes. Advisors often favor real assets because they’re physical, tangible investments that hold value, like real estate, commodities or infrastructure. While providing diversification and guarding against inflation, they can also earn income. Fresh interest in the asset class has come at an interesting time for the markets when core drivers of portfolio returns are shifting. Equities and bonds plummeted in 2022, but even more recently, they ended the first quarter lower, as markets grappled with geopolitical risk, elevated equity valuations, and a steepening yield curve.

Kristof Gleich, president and chief investment officer of Harbor Capital Advisors and issuer of the Harbor Commodity All-Weather Strategy ETF (HGER), said the 60/40 asset mix performed fine during the post-global financial crisis decade, which was hallmarked by disinflation and low interest rates. But since 2020, this portfolio mix has struggled, hamstrung by persistent above-target inflation, fiscal deficits and geopolitical risk. Those changing dynamics could open up new opportunities for classes such as real assets. “This decade is fundamentally very different from the prior,” he said. 

Set My Heart Free

Real assets cover a wide spectrum of investments, including commodities, real estate and infrastructure, with opportunities in both public and private markets. A recent McKinsey report suggests that $106 trillion in infrastructure investment will be needed through 2040 to meet demand for new and updated assets and services, which suggests that the asset class has a long macroeconomic tailwind. Returns from real assets are more closely tied to the actual economy, said Mamadou Abou Sarr, CEO of V-Square Quantitative Management, a multi-asset boutique manager. They also often have cash flows linked to inflation through rents, commodity prices or regulated pricing structures. “This gives them a more direct ability to preserve purchasing power than traditional equities and fixed income,” he said.

While these assets offer diversification and inflation protection, trade-offs exist. Commodities can be volatile, while certain real estate and infrastructure investments can be illiquid and some may only be available to accredited investors. 

Still, commodities may be the easiest to access for advisors, and ETFs make it simple to get broad-based exposure without needing to follow global supply and demand patterns for individual commodities. Like spices, a little goes a long way in owning commodities, as the traditional portfolio allocation is 5% to 7%. A small strategic holding allows investors to be positioned to take advantage of future supply shocks, as the bulk of commodities’ price movement occurs before most investors realize what’s happening, said Kathy Kriskey, head of alternatives ETF strategy at Invesco, which issues several commodity ETFs. Because of commodities’ inherent volatility, she advocates investors scale-in buying on dips and not chasing spikes.

Real estate and infrastructure produce income, unlike commodities, which is all price return. Sarr said real estate is a yield and capital appreciation play tied to local supply, demographics and credit conditions. Advisors should focus on cap rates relative to the cost of capital, occupancy trends and lease duration. “The sector matters enormously right now,” he said, but cautions it’s not a homogenous group. “Industrial and data center real estate look very different from office.”

Infrastructure is the most defensive of the three, he adds, with long-lived assets and regulated or contracted cash flows. The metrics that matter are yield on cost, contract duration and counterparty quality.

The Struggle Is Real

There are public and private investment vehicles for adding real assets. Brad Long, chief investment officer at Wealthspire, said when possible, he prefers publicly traded real assets, mainly because of liquidity and lower fees. For example, public real estate investment trusts tend to own Tier 1, fully occupied buildings and are a lower-risk type of asset. Digital infrastructure such as cell towers and data centers also are available through public REITs. “We would rather have the liquidity, the public entity, than the illiquidity of the private structure. Plus, obviously, private fees tend to be higher,” he said.

However, other assets such as airports, toll roads or other large infrastructure, tend to have limited public availability. To access those, Long said they use limited or general partners.

Jeff Wagner, senior partner and principal at LVW Advisors, prefers infrastructure investments for the stability of cash flow and the inflation buffer, and he tends to invest in interval funds or equity partnerships with either strong government or strong corporate partners. These deals, on average, have 85% of the revenue contracted. He has invested in electricity grid upgrades, transportation and renewable energy projects. The investments can achieve a 5% return plus an inflation-stated return goal. For individual clients, a portion of the income comes back as return of capital, making it fairly tax efficient, he said.

The Real Deal. Real assets also lend themselves to sustainable investing, and not just for renewable energy projects. Max Kulyk, CEO of Chicory Wealth, has invested in regenerative agriculture, water cooperatives and affordable housing. It’s also become easier to access these projects for his clients as investment minimums have come down. Kulyk has accessed the regenerative agriculture investment through Fidelity, his firm’s custodian. He also uses Citizen Mint, which has investment minimums as low as $10,000. Those platforms allow the investments to appear on client statements and can be easily included as part of Chicory Wealth’s performance reporting.

“Five years ago, when I tried to get into this, I was just pulling my hair out,” he said. “I felt like I couldn’t find anything that worked, either from the visibility standpoint, the scalability standpoint, let alone the impact standpoint, at minimums that my clients could access.”