Liquid Real Assets: An Alternative to Liquid Alternatives

Vince Childers, CFA and portfolio manager of the Cohen & Steers’ real assets strategy, says that liquid real assets are the “alternative” liquid alt in a new whitepaper. By “liquid real assets,” Mr. Childers is referring to real estate, commodities, natural resource equities, and listed infrastructure; and his arguments is that these alternative asset classes complement each other very well while advancing a portfolio’s three core objectives: diversification, total return, and inflation hedging.

Cohen and Steers Real Assets Diversification

The graphic above demonstrates how the four sub-classes of liquid real assets complement one another, and also reveals their only truly shared characteristic: Inflation sensitivity. That’s because inflation is in part measured by the appreciation of these real assets, financial-asset inflation doesn’t show up in the Consumer Price Index (CPI), the most popular measure of inflation.

Unanticipated jumps in inflation tend to benefit commodities, natural resource equities, and infrastructure, especially, whereas greater-than-expected inflation wreaks havoc on the stock and bond markets, as the image below shows (see paper for additional footnotes and performance disclosures):

Cohen and Steers Real Asset Performance

Liquid real assets differ from most other liquid alts, according to Childers, since liquid real assets are “directional strategies” targeting specific diversifying asset classes, with a higher risk/reward potential; whereas most liquid alts are non-directional, “generally unconstrained strategies” with lower risk/reward, and a hedging focus. Childers says that directional strategies are more like stocks, and non-directional strategies are more like bonds – so when considering allocating from a traditional “60/40” stock/bond portfolio to alternatives, one should generally allocate from the equity portion to liquid real assets, and from the fixed-income portion of the portfolio to other liquid alts. See the example below:

Cohen Steers Real Asset Portfolio

In the conclusion of his paper, Liquid Real Assets: The ‘Alternative’ Liquid Alt, Vince Childers says no single asset category is able to excel across all three core objectives: diversification, total return, and inflation hedging; due to the “inherent tradeoffs of the various real asset categories.” But, “building diversified portfolios of real assets allows investors to better navigate those tradeoffs,” according to Childers, and “accessing such real asset diversification through listed securities provides the added benefits of liquidity, transparency and real-time market pricing.”

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