Headwinds Turn to Tailwinds for Real Assets

To many market observers, the first quarter of 2016 marked the low point for sectors commonly associated with real assets. Stagnant global growth, oversupplied commodities markets, a strong U.S. dollar, and natural resource companies with bloated balance sheets overridden by enormous debt all combined to create tremendous headwinds that obscured the potential benefits of adding real assets to an investment portfolio.

But in recognizing the bottom in a cycle, the key now is to appreciate that a recovery across these sectors has occurred. The current environment, characterized by economic growth and heightened inflation expectations, provides an ideal backdrop for investors to consider real assets and their potential benefits.

The Winds Are Shifting

Inflation is something that has not been seen in well over a decade, but the ingredients are there: a strong U.S. economy, unemployment at historic lows, and the recent stimuli of tax reform, deregulation, and government spending, which may not even have fully taken hold yet. Plus, recent indications from the Fed suggest a potentially more aggressive approach to tightening.

Meanwhile, global growth is improving, and supply/demand dynamics across many commodities are back in balance and look to become even more favorable in the near future. Plus, companies across many of the primary industries associated with real assets are now in improved financial and operational shape after several years of restructuring to reduce capital expenditure and improve overall efficiency.

As the headwinds dissipate, the potential benefits of real asset investing are coming into clearer focus. Notably, an allocation to real assets can be used to help investors enhance portfolio diversification, gain exposure to global growth, and hedge against the impact of inflation. As the current environment progresses, it is a good time to consider the impact of inflation and an allocation to real assets.

The Current Case for Real Assets

Historically, periods of heightened inflationary pressures have provided a strong backdrop for real assets. An even more supportive scenario occurs when synchronized global growth coincides with inflation, much like today’s environment. Inflation has not been a strong consideration for some time, so many investors have remained overweight to traditional asset classes.

Returns Across Growth/Inflation Scenarios

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Source: Bloomberg; FactSet; FRED; IMF; VanEck. Data as of December 31, 2017. Analysis based on quarterly data from September 1990 to December 2017 with average return values (above) expressed as whole numbers. “+/- Growth” represented by time periods where year-over-year OECD real GDP growth increased (“+”) or decreased (“-“) from the previous quarter. “+/- Inflation” represented by time periods where realized U.S. inflation, as measured by U.S. CPI – All Items, was greater than (“+”) or less than (“-“) one-year-ahead inflation expectations, as measured by University of Michigan’s Inflation Expectations Survey. Asset class representations for “Natural Resources”, “Commodities”, “International (Int’l) Equities”, “Infrastructure”, “REITs”, “U.S. Equities”, and “U.S. Bonds” provided below. Past performance is not indicative of future results. This information is being provided for informational purposes only.

Despite the potential benefits, the inherent volatility of real assets remains a concern for many investors. They may also be limited by existing strategies in the marketplace that focus on specialized areas within real assets and lack flexibility to adapt to changing market conditions.

Access What Real Assets Can Offer

VanEck has over 50 years of experience helping clients gain access to real assets through a range of mutual funds and ETFs. Its most recent launch, the actively managed VanEck Vectors^® Real Asset Allocation ETF (NYSE Arca: RAAX), is designed to provide exposure to real assets while seeking to minimize the impact of drawdowns. It offers a way for investors to access the potential benefits of real assets while managing risk by adjusting allocations to real asset sectors and cash through its optimized allocation process. It seeks to address some of the predominant concerns that investors have expressed about real asset investing.

Commodities, which are typically associated with real assets, have historically experienced fewer and shorter moderate declines than global equities, yet they have more instances and longer periods of extreme declines. A diversified approach to real assets has historically helped reduce the risk of individual real asset sectors and resulted in a similar drawdown with less volatility relative to U.S. equities.

Commodities Have Had More Significant Drawdowns Than Other Asset Classes¹ (1975 – 2017)

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Source: Morningstar. Data as of December 31, 2017. Past performance is no guarantee of future results. Investors cannot invest directly in an index. See important disclosures, index descriptions, and definitions on last page.

A Mix of Real Assets Reduces Risk Similar to U.S. Equities² (2008 – 2017)

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Source: FactSet. Data as of December 31, 2017. Diversified Real Assets Blend is represented by the Blended Real Assets Index, the VanEck Real Asset Allocation Strategy’s benchmark, an equally weighted blend of Bloomberg Commodity Index. S&P Real Assets Equity Index, and VanEck^® Natural Resources Index. Equal weightings are reset monthly. The Blended Real Asset Index is an appropriate benchmark because it represents the various real assets investments considered by the Fund, covering natural resources equities, MLPs, infrastructure, real estate, and commodity futures. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

RAAX seeks to address this issue by using a data-driven, rules-based process to allocate among real assets with a key element of risk management embedded in each step:

1. Assess expected returns: Objective indicators identify which asset classes among commodities, natural resource equities, REITS, MLPS, and infrastructure are expected to have positive returns. These indicators were developed in conjunction with VanEck’s deep investment teams, who have broad experience in investment management as well as, in many cases, previous experience as geologists and engineers within the industries in which they now cover.
2. Defensive positioning: After assessing which asset classes are expected to have positive and negative returns, RAAX has the ability to raise a significant cash allocation. The more real assets segments with negative expected returns, the more cash RAAX will raise, up to a 100% allocation to cash and cash equivalents should unfavorable market conditions exist.
3. Optimized portfolio allocation: After determining asset class and cash allocation, RAAX decides how to weight these real assets through a minimum variance optimization—in other words, the short-term volatility and correlations³ of these asset classes are analyzed quantitatively with the goal of creating a portfolio with the maximum diversification and lowest risk profile.

Building on VanEck’s extensive experience in this space, RAAX offers investors the ability to access the potential benefits of real assets. By offering potential exposure across commodities, natural resource equities, REITs, MLPs, and infrastructure, with the ability to allocate up to 100% to cash and cash equivalents during market stress, RAAX helps address the impact of volatility long associated with real asset investing through a process that responds to changing market environments.

IMPORTANT DISCLOSURES

¹Commodity Futures are represented by the S&P GSCI; U.S. Equities are represented by the S&P 500 Index; International Equities are represented by the MSCI EAFE Index; U.S. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

²Natural Resource Equities are represented by the S&P Global Natural Resources Index; Commodities are represented by the Bloomberg Commodity Index. REITs are represented by the MSCI US REIT Index; Global Infrastructure is represented by the S&P Global Infrastructure Index; MLPs are represented by the Alerian MLP Index; Diversified Real Assets Blend is represented by the Real Assets Blended Index; U.S. Equities are represented by the S&P 500 Index.

³Correlation is a statistic that measures the degree to which two securities move in relation to each other.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

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The Blended Real Assets Index consists of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck^® Natural Resources Index. Equal weightings are reset monthly. The S&P Real Assets Equity Index measures the performance of equity real return strategies that invest in listed global property, infrastructure, natural resources, and timber and forestry companies. The VanEck Natural Resources Index is a rules-based index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the production and distribution of commodities and commodity-related products and services. Sector weights are set annually based on estimates of global natural resources consumption, and stock weights within sectors are based on market capitalization, float-adjusted and modified to conform to various asset diversification requirements. U.S. Equities: The S&P 500^® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors. Agribusiness Equities: The MVIS Global Agribusiness Index is a modified market cap-weighted index tracks the performance of the largest and most liquid companies in the global agribusiness segment. Its unique pure-play approach requires that companies have to generate at least 50% of their revenues from agri-chemicals and fertilizers, seeds and traits, from farm/irrigation equipment and farm machinery, from agricultural products (incl. Grain, tobacco, meat, poultry and sugar), aquaculture and fishing, livestock, plantations and trading of agricultural products. Coal Equities: The MVIS Global Coal Index is a modified market cap-weighted index tracks the performance of the largest and most liquid companies in the global coal segment. Its unique pure-play approach requires that companies have to generate at least 50% of their revenues from coal operation (production, mining and cokeries), transportation of coal, from production of coal mining equipment as well as from storage and trade. Gold Equities: The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange. MLPs: The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations. Oil Service Equities: The MVIS U.S. Listed Oil Services 25 Index is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. Unconventional Oil & Gas Equities: The MVIS Global Unconventional Oil & Gas Index is intended to track the performance of the largest and most liquid companies in the unconventional oil and gas segment. The pure-play index contains only companies that generate at least 50% of their revenues from unconventional oil and gas which is defined as coal bed methane (CBM), coal seam gas (CSG), shale oil, shale gas, tight natural gas, tight oil and tight sands. Global Metals & Mining Equities: The MSCI ACWI Metals and Mining Index is composed of large and mid cap stocks across 23 Developed Markets countries and 24 Emerging Markets countries. All securities in the index are classified in the Metals & Mining industry (within the Materials sector) according to the Global Industry Classification Standard (GICS^®). Commodities: The DBIQ Optimum Yield Diversified Commodity Index Excess Return is an index composed of futures contracts on 14 heavily traded commodities across the energy, precious metals, industrial metals and agriculture sectors. Steel Equities: The NYSE Arca Steel Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the production of steel products or mining and processing of iron ore. REITs: The MSCI US Investable Market Real Estate 25/50 Transition Index is designed to capture the large, mid and small cap segments of the U.S. equity universe. The Index will transition completely from the starting MSCI US REIT Index into the MSCI US IMI Real Estate 25/50 Index over a specified period. Infrastructure: The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

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