Advisers warming to real assets as stock market volatility picks up

Real estate, REITS, MLPs increasingly on the radar screen, but new study finds allocations in just one of five portfolios

Apr 10, 2014 @ 12:01 am

By Jeff Benjamin

real assets, asset allocation, mlp, reit, real estate, hedge funds, private equity, stocks, bonds, equities
+ Zoom

The latest bout of stock market volatility is helping to make the case again for diversifying into assets that investors can actually touch and feel.

Physical real estate, real estate investment trusts and infrastructure master limited partnerships are the most common forms of the real assets that are hitting the radar screens of savvy financial advisers.

Much like the broader alternative investments universe, real asset investments are becoming an increasingly popular for reducing portfolio volatility.

As the data illustrate, most real asset investments are more about non-correlated exposure than white-hot performance.

(Don't miss: The perfect storm: Why alts make sense)

So far this year, real estate mutual funds tracked by Morningstar Inc. gained an average of nearly 10%, while the S&P 500 has been virtually flat.

Last year, when the S&P 500 gained 30%, the category gained 2.3%.

Morningstar doesn't have a specific category for master-limited partnership funds, but a screen of funds with MLP in the name found that the average return this year was 2.8%.

The MLP fund universe had an average gain of 24.4% last year.


“The main thing about real assets is you're getting the diversification of lower correlation to traditional assets, but you're also typically getting some inflation protection,” said James Cunnane, chief investment officer of the MLP & energy Infrastructure team at Advisory Research Investment Inc.

Even with inflation in the U.S. at barely discernable levels, the Fed's unwinding of quantitative easing and the looming threat of higher interest rates make the case for real assets an increasingly logical argument.

“The longer-term attraction of real assets is definitely the inflation sensitivity, because with higher inflation, you will be better off in real assets,” said Keith Black, managing director of curriculum and exams at the Chartered Alternative Investment Analyst Association.

“Another part of the attraction is that we're talking about real assets,” he added. “After the financial crisis, people realized that the stocks and bonds they owned were just paper assets.”

As a subcategory of alternative investments, real assets are sometimes overshadowed by the higher-profile hedge funds and private equity investments, but there are components of the financial advice community that are heavily committed to real asset exposure.

An as-yet released study by Cohen & Steers Inc. estimates that 90% of advisers are already using real assets for their client portfolios.

But despite the widespread use of real assets, advisers are only using real assets in 20% of their client base, according to the report, which was based on a survey of 660 financial advisers.

For those accounts containing real assets, the allocation is typically between 5% and 9%, illustrating a serious commitment to the asset class.

“It was a little surprising to us to find that among advisers using real assets, they are only using it in about one out of five of their client portfolios,” said Vince Childers, manager of the Cohen & Steers Real Asset Fund (RAPIX).

The research also found that only 40% of advisers are treating real assets as a core holding, with the majority using the asset class for tactical purposes.

Mr. Childers acknowledged his obvious bias when suggesting that investors should have between 10% and 20% allocated to real assets.

“We think people are under-allocated to real assets,” he said, citing an ability to hold value in an inflationary environment.

“But people need to understand that the portfolio diversification benefits go beyond inflationary scenarios,” he added. “In periods like we've seen recently, when stocks and bonds are not diversifying each other very well, that's the sweet spot for real assets.”

The broadest definition of real assets can include everything from direct ownership in real estate to fine art, but the Cohen & Steers study primarily focused on real estate, REITs, infrastructure MLPs and natural resource equities.

The survey found that more than 80% of respondents recognize direct real estate ownership as a real asset, but only about 30% are using direct real estate as a real asset investment.

REITs, which are used by 75% of the respondents, stood out as the most popular means of gaining real asset exposure. Interestingly, less than 35% of the respondents recognized REITs as a real asset.

Nearly 70% of respondents recognized precious metals as a real asset, but less than 40% say they are using precious metals as a real asset allocation.

Looking past what might appear to be some confusion or lack of communication surround real asset nomenclature, it is more important to focus on the growing appetite for the benefits that real assets can bring to a portfolio.

“People are worried about interest rates going up,” Jerry Swank, founder of Cushing Asset Management, said while discussing a new partnership to manage MLP and energy-related mutual funds with MainStay Investments.

“Don't underestimate this humongous energy renaissance going on in the U.S.,” he added. “We have a decade or more of growth in that area ahead of us.”

Just like there are multiple stripes of hedge funds and alternative strategy mutual funds, a real asset allocation should be built around diversification.

While an MLP fund allocation can hopefully catch the energy infrastructure renaissance, the REIT space is poised to benefit from increased demand for housing and office space.

“Right now we're seeing improving fundamentals in real estate, but they're still not building enough to make up for what hasn't been built over the past five years,” said Calvin Schnure, senior economist at the National Association of Real Estate Investment Trusts.

“Things that affect real estate are different than the things that affect stocks,” he added. “Improved job growth and consumer spending will benefit REITs because that translates almost one-for-one to an increased need for office space, because job growth means vacancy rates will fill faster.”


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26


Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video


Compensation changes at broker-dealers

Senior columnist Bruce Kelly and deputy editor Bob Hordt discuss pay changes underway at firms such as LPL and Raymond James, in some cases related to the DOL fiduciary rule.

Latest news & opinion

More advisers disapprove of Trump job performance at six-month mark

More than half of respondents to InvestmentNews poll say their confidence has dropped since start of term. Supporters give him partial credit for market uptick.

Fidelity taps Goldman Sachs to expand lending services through RIAs

Streamlined non-purpose loans use investment portfolios as collateral.

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Vanguard winning at bond inflows, too

But iShares is strong competition.

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print