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New research paper looks at performance of direct investments in real assets

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Deutsche Asset & Wealth Management Global Financial Institute has published a paper on the performance of direct investments in real assets, written by KJ Martijn Cremers, professor of finance at the University of Notre Dame.

 
The paper investigates several aspects of performance of direct investments in three real asset classes: natural resources (timberland and farmland), infra­structure (specifically investments in energy infrastructure), and commercial real estate.
 
The main findings are:
 
• Investing in these real asset classes would have provided significant diversification benefits relative to a traditional portfolio consisting of only public equities and government bonds, without evidence of deteriorating overall performance.
 
• While investments in natural resources had particularly low downside risk, investments in energy infrastructure and commercial real estate showed significant downside risk, comparable to a traditional portfolio of equities and bonds.
 
• With the exception of timberland investments (and commercial real estate for 1978-1987), the real asset classes did not provide any inflation hedging benefits over our full 1978-2012 time period.
 
The paper looks at the following in these three asset classes:
1.            The risk-return trade-off
2.            Their downside risk
3.            The correlation with public equities, govern­ment bonds, and the other real asset classes
4.            The diversification benefits from adding real assets to a portfolio consisting of equities and bonds
5.            Their ability to hedge exposure to inflation
6.            Their exposure to systematic shocks to liquidity in the stock market.

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