“Real asset” and commodity equities have significantly outperformed core equities and commodity futures respectively, with comparable volatility, and have beaten inflation more frequently than core equities and commodities over a rolling five-year investment horizon.
Accessing real assets through equities, S&P Indices’ latest research paper, demonstrates that investors seeking a real asset allocation need not be handcuffed by traditional asset class boundaries. Investing in real asset-based equities is an alternative way of accessing commodities, real estate and infrastructure, with investors increasingly recognising real assets as a distinct asset class that offers both inflation protection and portfolio diversification. Real assets that can be accessed through equity investments include natural resources and commodity producers stocks, equity Real Estate Investment Trusts and publicly-listed infrastructure assets, offering the benefits of enhanced liquidity and transparency.
For example, over the last 15 years, the S&P North American Natural Resources Sector Index, a commodity-based equity index, has seen a total return of 370.4% in line with commodity prices, as reflected by S&P GSCI Spot (255.3%) and has behaved quite differently from core equities, as measured by S&P 500 (+167.9%). The S&P Energy Select Sector Index has also performed in line with energy futures. This performance profile suggests that commodity-based equity may be driven more by fundamentals in the commodity market than those in the equity market and that, historically, this market has served as an effective alternative route to obtaining exposure to commodities.
Real assets and commodities are known to tend to provide inflation protection because they are among the primary drivers of inflation. However, the research showed that a hypothetical composite index of real asset-based equities that equally weights commodity-based equities, REITs and listed infrastructure-based equities significantly outperformed core equity indices and commodity indices, respectively over 15 years, with comparable volatility. In rolling five-year periods over the last 15 years, this real asset-based equity portfolio has beaten inflation more frequently than commodity futures and core equities.
Contrary to a common perception, real asset based equities can also deliver diversification potential, as an important factor that impacts diversification is dispersion of asset returns. Since real asset-based equities often exhibit performance profiles that are distinct from those of core equities, they may provide a certain degree of portfolio diversification.
Xiaowei Kang, Director, Global Research and Design at S&P Indices, says: “Investors are seeing the value of accessing real assets through equities as an alternative means of accessing commodities, real estate and infrastructure. This may be showcased by the significant assets in investment products linked to various S&P real asset-based equity indices, which stands at more than USD12 billion in asset under management.”