For much of the past few decades investors lived in an age of abundance.
Supply chains were resilient and globalisation kept costs low, and (prior to the post-pandemic recovery) inflation seemed like a relic of the past.
Traditional stock and bond portfolios flourished in that environment, with diversification working just as theory suggested.
But the world has changed.
The pandemic, geopolitical fractures, and a wave of protectionist policies have ushered in an era of scarcity; a period characterised by supply shocks, inflationary pressures, and heightened uncertainty.
Against this backdrop, many wealth managers are rethinking their reliance on the classic 60/40 portfolio.
Diversification is no longer a luxury, it is a necessity.
Real assets — global real estate, listed infrastructure, natural resource equities, and commodities — offer a compelling way to build portfolio resilience.
While investors often dabble in real estate investment trusts or inflation-protected bonds, this piecemeal approach misses key opportunities of the asset class.
Taken together, these ‘core four’ categories create a coherent portfolio that complements and diversifies traditional allocations.
The rationale rests on three pillars: inflation sensitivity, diversification and a balanced risk-return profile.
Firstly, real assets have historically outperformed when inflation surprises to the upside. In an era where supply constraints and wage pressures could fuel persistent price shocks, this hedging is vital.
Beyond inflation defence, real assets provide diversification; their correlations vary across cycles, offering ballast when traditional assets move together, as they did in 2022.
Finally, positioned between equities and fixed income on the risk spectrum, real assets offer the potential for equity-like returns with less volatility.
Crucially, this balance makes it easier for investors to stay invested over the long haul.
Looking ahead, the economic backdrop is expected to remain volatile, with bouts of unexpected inflation.
These conditions should support real assets returns over the long term.
Opportunities are likely to emerge where structural under-investment meets accelerating demand, from rising populations driving infrastructure build-outs, to the energy transition as the world searches for clean and reliable baseload power, to new technological requirements, such as the need for data centres and power sources for next-gen AI.
Current valuation levels for real assets appear reasonable, particularly in light of stretched equity market multiples.
Importantly, historical analysis suggests that when real (inflation-adjusted) yields are falling and inflation breakevens (the market’s guess about future inflation) are rising, as they are today, real assets perform particularly well.
A diversified real assets blend has delivered six-month average annualised returns of nearly 20 per cent in such environments.
A portfolio by design
The inflation shock of 2022 was a real-world stress test.
As equities and bonds both posted negative returns, traditional diversification faltered.
By contrast, real assets delivered, with some benchmarks posting double-digit gains at the height of the turmoil. This was not an anomaly; it was a demonstration of why a diversified allocation to real assets belongs in every portfolio.
The lesson is clear: a 60/40 portfolio carries latent exposure to inflation shocks.
Real assets mitigate that risk and offer diversification while avoiding the potentially long lockups, high fees, and liquidity risks associated with other diversifiers such as private market strategies.
The optimal mix of real assets is not static; it requires careful construction and active management.
One approach emphasises a barbell allocation, giving meaningful weight to real estate and commodities, which diversify each other well, while infrastructure and resource equities provide both stability and growth potential.
Tactical positioning also matters. For example, while commodities remain essential to long-term inflation hedging, current supply trends and slowing growth argue for caution.
Conversely, global real estate (after a long stretch of underperformance) is beginning to look attractive again. Infrastructure and resource equities, meanwhile, are well-placed to capture relative value in today’s environment.
This flexibility is a hallmark of active management in real assets.
While a significant majority of value-add should ideally come from bottom-up security selection, dynamic top-down allocation ensures portfolios adapt to evolving macro conditions.
The goal is not to chase every theme but to anchor in value and remain patient, allowing conviction to build through research and time.
No discussion of real assets can be complete without gold. Held in a neutral allocation, gold remains a timeless hedge.
In periods of fiscal dominance or unanchored inflation expectations, such as the late 1970s, gold has consistently been among the top performers.
While it is impossible to predict precisely when such risks will crystallise, the insurance value of gold is undeniable.
A one-stop shop for diversification
It is important to stress that real assets are not a replacement for fixed income — they complement it.
For investors overweight bonds, real assets offer a higher-return proposition.
For balanced portfolios, they bring resilience against inflation shocks that threaten the equity-bond correlation.
Real assets are not in competition with bonds; they are expected to offer complementary diversification benefits in environments where bonds and stocks tend to struggle.
For many investors, diversifying into real assets is no longer optional, it is essential for navigating the uncertainties of the decade ahead. But doing so piecemeal risks confusion, inefficiency, and missed opportunities.
A well-constructed, actively managed real assets portfolio offers wealth managers a coherent, cost-effective solution: one that helps protect against inflation shocks, diversifies core holdings, and balances risk and return in a way that encourages long-term discipline.
Vince Childers is head of real assets multi-strategy at Cohen & Steers
