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Let's Get Real About Indexing Real Assets How can real assets help investors manage risk?
BY Jodie Gunzberg

INTRODUCTION


Over the past five years, investment in real asset strategies has increased by 325%, with 80% of institutions targeting up to 15%, and two-thirds still feeling they are underinvested. One of the main reasons for the increase in allocations to real assets is that investors are looking to manage risk in a new way with new tools. From the high correlation across assets through the recessions of 2001-2003 and 2007-2009, many investors are moving from traditional asset class allocations defined by security type to risk-type based allocations. For example, rather than defining asset classes by traditional definitions like stocks, bonds, and real estate, investors are considering asset classes by risk-type similarities that tend to provide inflation protection and diversification. Popular risk-based allocation models often include growth, income, liquidity, and real assets as categories for portfolio construction.



In this paper, a group of real assets will be defined as an investable index created to measure the performance of the underlying asset class and to serve as an index benchmark. This is the first time a complete set of liquid real assets (infrastructure, property, natural resources, and inflation bonds) have been combined in an index by using equities, fixed income, and futures. The S&P Real Assets Index gives investors an innovative yet simple tool that may improve diversification and inflation protection while seeking to meet the risk requirements of today.



WHAT ARE REAL ASSETS?


Despite the inflows into real assets, it has been a loosely defined space. To illustrate this, the range of real asset definitions can include tangible assets, assets with inflation and diversification properties, and investments that are independent from the variations in the value of money. The following are a few definitions from well-known sources that have emphasis on different characteristics.

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