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Global Real Assets – a new asset class is forming

Global Real Assets – a new asset class is forming

Tangible and operating assets that offer a natural hedge against long term inflation are no longer a minority investment. As investors look for more effective ways to manage market volatility, sectors that tap into the global demand for natural resources and more efficient infrastructure are set to become a major asset class of their own. It’s worth bearing in mind, too, that while inflationary pressures have eased somewhat recently, significant long-term inflationary pressures still exist, with the potential to harm investment returns. Real assets can help protect against the ravages of inflation for long-term investors and while the future is uncertain in many markets, this asset class can allay some of the concerns of modern investment portfolios. Pension funds have a number of tactics at their disposal to manage their asset-liability risks in inflationary times. Inflation-linked swaps can be used to exchange a fixed income for an inflation-linked one. Index-linked bonds can deliver returns pegged to an inflation benchmark. But high-quality index-linked bonds are scarce, expensive and therefore low-yielding. Also, inflation swaps can be complex and so far have encountered only limited take-up among pension funds. The simplest way to manage inflation is to gain exposure to assets where value and returns are directly linked to rising prices – what we refer to as ‘real assets’. Partly because of pressures on inflation – and partly because of the phenomenal global demand for the assets that we categorise in this class – we believe that real assets are ready to move into the mainstream in a dramatic way. For any pension fund keen to continue delivering positive real returns, careful attention now needs to be paid to this area of asset allocation.

The natural inflation hedge

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