allocation approach that encompasses both markets may
help investors achieve broader sector and geographic diversification, along with the advantages of greater liquidity for more efficient portfolio management.
A Premium on Manager Expertise
Institutions listed three main concerns about investing
in real assets: (1) the ability to accurately assess risk-return trade-offs, (2) timing of the market cycle, and ( 3)
investment liquidity in an asset class in which objective
and reliable market data can be hard to obtain. Because
of these concerns, institutions placed a premium on external expertise.
Survey results show that institutions gave extra weight
to consultant recommendations in real assets. Furthermore,
when it came to investing in real assets, institutions valued
the expertise of their asset managers more than any other
factor, to an extent rarely seen in other asset classes (Exhibit
3). A manager’s investment performance and length of track
record were also cited as top considerations.
The reliance on expertise reflects institutions’ lack of
familiarity with real assets, as well as the inherent com-plexities associated with these investments—not the
least of which is understanding how various components can work together in the context of a diversified
investment strategy. Investment managers and consultants have an opportunity to facilitate the growth of real
assets by providing education and support to investors
thinking about how best to integrate real assets strategies
into their portfolios.
The need for better diversification, risk-adjusted returns,
and income is stoking demand for infrastructure, real estate, commodities, farmland, timber, and other tangible
assets. As these markets continue to evolve, the range of
real assets categories in use is expanding.
Most institutions have targeted 6% to 15% of their
portfolios for real assets, but underinvestment remains
a significant challenge. Yet institutions generally plan
to up their stakes in real assets in the coming year,
pointing to continued growth in the institutional investment market.
Though one-third of institutions focus on the private
market for their real assets allocations, a large and growing number of institutions use the listed market as a
complement to or substitute for private investments. As
a result, institutions have an increasing number of options for accessing listed real assets.
The experiences of institutions with significant investments in real assets strongly suggest that investors will be
more satisfied with their results if they work with managers who have high levels of demonstrated expertise. In
many cases, these will be specialist managers with long
track records in specific real assets categories. n
Vince Childers is a Senior Vice President and Portfolio Manager for the Cohen & Steers Real Assets Strategy. Consultant Andrew McCollum advises on investment management
in the US for Greenwich Associates. Cohen & Steers is not
affiliated with Greenwich Associates.
Exhibit 3: What Factors Are Important in Real Assets Investment Decisions?
Source: Greenwich Associates 2014 Institutional Real Assets Research
Length of Manager Track Record
Low Volatility of Returns
5–Very Important 4 3 2 1–Not Very Important