In the final part of our alternative income strategies series we examine the benefits of Real Assets
Global population growth, more food being consumed, more homes, highways and buildings needing to be constructed/upgraded and more waste being created: the need for investment in resource stability is expanding on a daily basis and this is why financial advisors can no longer afford to ignore Real Assets.
“Advisors have often been concerned about the performance of Real Assets in a low inflation, low commodity price environment,” said Michael Underhill, chief investment officer of Capital Investments LLC, sub-advisor on the Sprott Real Asset funds. “Short term performance of Real Assets can be depressed in such an environment, but the bigger picture remains global population growth and natural resource consumption in the long-term.”
Real Assets are alternative asset classes that often include investments in infrastructure and real estate, and can also include commodities and related investments such as timber, agriculture, precious metals, and natural resources.
“Interest has been increasing among investors, in recent years, to expand from the traditional asset classes to construct a more diverse portfolio,” commented Underhill. “Real Assets provide a broader diversification beyond traditional equity and fixed income allocations with historically low correlation to stocks and bonds.
“Gold, for instance, has a long history of being an uncorrelated asset and its benefit as a portfolio diversifier is highlighted in today’s low interest rate environment,” said Paul Wong, senior portfolio manager of Sprott Gold and Precious Minerals Fund. “As more central banks begin to adopt negative interest rate policies, gold becomes more attractive as the ultimate store of value. In a world where macro driven systemic risk remains elevated, the need and the value of an uncorrelated asset becomes even greater.”
“In addition to the diversification benefits, Real Assets also offer inflation protection to a portfolio where increasing geopolitical risks create greater volatility in commodities markets,” added Underhill. “Allocating to Real Assets can hedge the inflation risk with exposure to companies whose revenues increase when underlying commodity prices rise.”
In particular, he pinpoints commodity influenced equities as strong performers in the current marketplace.
“Recent company balance sheet restructuring through non-core asset sales and reductions in capital expenditures, coupled with the recent rally, have provided companies with stronger commodity pricing, greater cash flows and further strengthened their balance sheets,” he said.
However, there is one area he believes may be being overlooked by many investors.
“Timber has grown steadily as an asset class; the value of assets under management by timberland investment management organizations has doubled in the past 10 years,” he said. “However, the asset class remains relatively small, and increased demand from institutional investors has increased valuations.
“In today’s environment, we are still facing an upward sloping yield curve. An upward sloping yield curve implies a few things for timber products. The divergence from short-term to long-term rates implies greater future growth from a macro level. Traditionally, a steep yield curve has been associated with an uptick in wood products, as this encourages mortgage lending and home construction.”
Overall, Real Assets appear to be an excellent complement to a core portfolio because they tend to offer sustainable yield, inflation protection, and tremendous, uncorrelated diversification to a traditional stock and bond portfolio.
For a look at seven ways an alternative fixed income strategy can outperform, download the thought paper at sprott.com/unconstrained.
“Advisors have often been concerned about the performance of Real Assets in a low inflation, low commodity price environment,” said Michael Underhill, chief investment officer of Capital Investments LLC, sub-advisor on the Sprott Real Asset funds. “Short term performance of Real Assets can be depressed in such an environment, but the bigger picture remains global population growth and natural resource consumption in the long-term.”
Real Assets are alternative asset classes that often include investments in infrastructure and real estate, and can also include commodities and related investments such as timber, agriculture, precious metals, and natural resources.
“Interest has been increasing among investors, in recent years, to expand from the traditional asset classes to construct a more diverse portfolio,” commented Underhill. “Real Assets provide a broader diversification beyond traditional equity and fixed income allocations with historically low correlation to stocks and bonds.
“Gold, for instance, has a long history of being an uncorrelated asset and its benefit as a portfolio diversifier is highlighted in today’s low interest rate environment,” said Paul Wong, senior portfolio manager of Sprott Gold and Precious Minerals Fund. “As more central banks begin to adopt negative interest rate policies, gold becomes more attractive as the ultimate store of value. In a world where macro driven systemic risk remains elevated, the need and the value of an uncorrelated asset becomes even greater.”
“In addition to the diversification benefits, Real Assets also offer inflation protection to a portfolio where increasing geopolitical risks create greater volatility in commodities markets,” added Underhill. “Allocating to Real Assets can hedge the inflation risk with exposure to companies whose revenues increase when underlying commodity prices rise.”
In particular, he pinpoints commodity influenced equities as strong performers in the current marketplace.
“Recent company balance sheet restructuring through non-core asset sales and reductions in capital expenditures, coupled with the recent rally, have provided companies with stronger commodity pricing, greater cash flows and further strengthened their balance sheets,” he said.
However, there is one area he believes may be being overlooked by many investors.
“Timber has grown steadily as an asset class; the value of assets under management by timberland investment management organizations has doubled in the past 10 years,” he said. “However, the asset class remains relatively small, and increased demand from institutional investors has increased valuations.
“In today’s environment, we are still facing an upward sloping yield curve. An upward sloping yield curve implies a few things for timber products. The divergence from short-term to long-term rates implies greater future growth from a macro level. Traditionally, a steep yield curve has been associated with an uptick in wood products, as this encourages mortgage lending and home construction.”
Overall, Real Assets appear to be an excellent complement to a core portfolio because they tend to offer sustainable yield, inflation protection, and tremendous, uncorrelated diversification to a traditional stock and bond portfolio.
For a look at seven ways an alternative fixed income strategy can outperform, download the thought paper at sprott.com/unconstrained.
