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November/December 2014

Building a Real Asset Portfolio



A defining characteristic of real assets is that they are “hard” or “tangible” assets and provide ownership of a store of value. They tend to preserve value in inflationary environments and they can also serve as a diversifier within a growth portfolio, as a result of an expected lower correlation to equity-like asset classes.

The decision to add real assets to a portfolio depends on an investor’s objectives, risk tolerance, and structural constraints. Illiquidity, performance measurement, regulatory risk, financing risk, and investment risk, among other risks, should be considered. Furthermore, within each real asset category are sub-asset classes with varying risk/ return profiles. Given the characteristics of the asset class, it is important for investors to have a welldiversified portfolio customized to their objectives and constraints.


Real assets provide exposure to investments linked to physical assets for which the return is expected to come largely from the yield, income, or income-generating potential. Real assets broadly include property, infrastructure, timberland, shipping, and natural resources. In addition, assets can be held in a listed or an unlisted form.

Real assets provide store of value over the long term, inflation sensitivity, and diversification within a portfolio. In addition, they tend to have a cash-flowgenerating focus. These characteristics are evident at different levels for the various real asset sub-classes, but a well-constructed and diversified portfolio could exhibit all of these aspects. The full potential of real assets can be achieved with direct or private commingled vehicle implementation. On the other hand, liquid investments are a valuable alternative to offset daily valuation and illiquidity issues.


This article concentrates on natural resources, infrastructure, and real estate as a broad representation of real assets (see Figure 1). Each of these asset classes is characterized by a range of risk and return subcategories and varying implementation options.


The growth or return-generating portion of a portfolio could be viewed in a factor-based approach, which represents a combination of quantitative and qualitative risk/return drivers. The same approach could be applied to real assets. A number of risk factors need to be considered, and their significance varies among sub-asset classes:

  • GDP growth sensitivity: exposure to general economic growth.
  • Inflation sensitivity: exposure to general price level in a given market.
  • Cash-yield dependence: component of total returns stemming from cash yield.
  • Interest rate sensitivity: specific sensitivity to a change in base rates.
  • Project development risk exposure: exposure to project-specific development risk.
  • Financing sensitivity: dependence on continued availability of finance.
  • Emerging market exposure: specific exposure to emerging economies.
  • Liquidity rating: ability to sell exposures in an orderly and timely fashion.
  • Regulatory exposure: dependence on regulatory support.


A number of considerations should be taken into account when building a real asset portfolio. One approach for the initial structure is to define the investor’s objectives in terms of defensive versus growth-oriented strategy, as well as inflation sensitivity (see Figure 2).

For the investor under Profile 1 in Figure 2, a strategy should emphasize more income-oriented/defensive investments that generate steady cash flows. Real assets that are defined as “core” strategies would be the majority of investments comprising a defensive portfolio.

For the investor under Profile 2, a combination of opportunistic and core plus (value-add) strategies would be the main building blocks of a real asset portfolio.

It is imperative for a real asset portfolio to provide a diversified strategy that will not only correspond to the investor’s objectives but also mitigate volatility/risk in the overall portfolio. Therefore, another aspect to consider when building a diversified real asset portfolio is the portfolio’s sensitivity to the risk factors outlined earlier. The individual asset classes’ factor sensitivities could be used as a guide when building a portfolio to suit the investor’s needs and constraints.


An important step in building a real asset portfolio is striking the right balance between tolerance for complexity and the need for liquidity. Most real asset portfolio objectives are achieved through direct investing, but liquidity should also be considered as a constraint for some investors. Factors such as availability of structures and regional, tax, and regulatory constraints should also be taken into account when the liquidity structure of a real asset portfolio is determined.

Whenever possible, investors should consider the liquidity of their overall portfolio as part of the strategic asset allocation process/decision. This approach would predetermine the required liquidity of the real asset allocation, which could be implemented through both unlisted and listed fund options. The demand for real assets and the overall development of the asset class have led to the availability of more liquid alternatives for these investments.

When illiquidity is a concern, investors can take a couple of approaches to maximize the potential of their real asset program without necessarily locking access to the assets for a long period. For example, an investor can consider utilizing listed strategies as an interim step in the investment program or create a portfolio that has a combination of both listed and unlisted options. Listed strategies could also serve as placeholders and preserve the asset class exposure until a suitable long-term unlisted investment option was identified.


Building a real asset portfolio is a process that requires multiple considerations in terms of planning, strategy selection, implementation, monitoring, and capitalizing on opportunities. Real assets have multiple roles in a portfolio, depending on investors’ objectives and constraints. In a low-yield environment, real assets’ diversification, inflationlinkage, return, and store of value characteristics provide attractive portfolio-construction building blocks, and Mercer encourages investors to consider and evaluate the risks and benefits of these asset classes in the context of their overall portfolio. The nuances and implementation options of real assets could be utilized to create a diversified portfolio that would meet the above-mentioned characteristics and investors’ objectives.


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The findings, ratings, and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualized investment advice.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

Information contained herein has been obtained from a range of third-party sources. Although the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission, or inaccuracy in the data supplied by any third party.

Investment advisory services provided by Mercer Investment Consulting, Inc.


Download Mercer’s recent research paper on building a real asset portfolio.



Anthony Brown (St. Louis)
US Director of Research
+1 314 982 5741
Hendrie Koster (Sydney)
Asia/Pacific Director of Research
+61 2 8864 6306
Phil Edwards (London)
European Director of Research
+ 44 117 988 7548
David Zanutto (Calgary)
Canadian Director of Research
+1 403 476 3269

Download PDF: Building a Real Asset Portfolio

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