SOUND VIEWS – Q2 2024 REAL ASSETS

I’ve spent time touching on some of the more familiar types of investment, namely stocks, bonds, and cash. Another core category I typically hold for clients is called “real assets” which covers a wide range of investment types. Real assets are meant to be a diversifying investment with portfolios because what drives their performance can be very different than what impacts stocks and bonds. As Morgan Stanley points out [1] real assets also serve as a potential inflation hedge for portfolios. For our purposes I’ll focus on the two primary investments we use, commodities and real estate. 

Many of us are familiar with investing in real estate through home ownership, and in fact a primary residence is often an important source of wealth. Gradually paying down a mortgage and seeing (excluding the big moves of the last few years) moderate price appreciation allows for gains to quietly accrue without much thought. For those who rent however the situation can be very different where there’s upward pressure on leases and you’re forced to pay more or search for a new home.  This is happening now where you’re seeing record rents in many cities. Owning real estate as an investment allows you to profit from this upward price pressure. Purchasing individual properties can be difficult and costly for individuals, it also introduces a variety of risks. Another way to access the real estate market is through Real Estate Investment Trusts (REITs).

REITs are companies that are formed for the sole purpose of buying and managing real estate properties. These companies receive tax advantages from the government, provided they distribute the majority of their income to their investors. In addition to generating income, REITs can also benefit from the appreciation of the properties they acquire and sell, which allows them to grow their business. Investors who own REITs can benefit from the potential to earn profits with an increase in the value of their REIT shares over time. While REITs are not a perfect hedge against inflation, they often experience rent increases when inflation rises. It’s important to note that investing in REITs involves different risks compared to investing in stocks, and these risks should be weighed against an investor’s overall risk tolerance.

When you turn on the nightly news, usually they’ll do a rundown of business updates along with a quick check on the stock market followed by a comment on oil or gold, these are commodities. Commodities are raw materials that go on to be used elsewhere and where branding doesn’t really matter. A gallon of gasoline will run your car just fine if it came from Texas or the North Sea. There are many types of commodities that fall into four primary baskets: energy, precious metals, metals, and agricultural. Most people are familiar with the big ones: oil, natural gas, gold, and silver; but few people think about things like wheat, coffee, and corn as potential investments. Each commodity category and the commodities themselves are impacted by different things. A drought in Europe can mean higher wheat prices at a time when excessive rain in Brazil means lower coffee prices. Given these diverse factors and their relation to inflation, commodities can have very different returns than traditional investments. This also can make them a good hedge for investors.  I typically purchase them through a diversified exchange traded fund that provides exposure to a broad basket. The individual markets can be very volatile, and it’s nearly impossible for a regular investor to go out and buy a commodity outright. You don’t want to end up with 1,000 bushels of corn delivered to your door after all.

By selectively owning diversified investments and using them to complement other strategies, we can manage risk while also hopefully increasing return. Because these types of investments offer very unique characteristics, knowing what you own or working with someone who does can help you avoid some of the pitfalls of these asset classes.

 


[1] https://www.morganstanley.com/articles/real-assets-investing-guide-opportunities#:~:text=Exposure%20to%20real%20assets%20can,benefit%20from%20economic%20growth%20trends.

**There are significant risks associated with real estate investment trusts (REITs), including, but not limited to the possibility of losing your entire investment; no guarantees regarding future performance; upon sale or distribution of assets you may receive less than your initial investment; fluctuation of value of assets; lack of a public market; limited liquidity; limited transferability; reliance on the advisor to select and manage assets; payment of fees and various economic factors that may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Shares of any REIT are not suitable for all investors. Commodity investing is speculative and can be extremely volatile. There are significant risks associated with commodity investing, including, but not limited to the possibility of losing your entire investment due to the extremely volatile prices since the commodities industry can be significantly affected by world events, import controls, worldwide competition, government regulations, political, currency instability, and economic conditions, all of which can have an impact on commodity prices.

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