Having experienced the first US inflationary cycle since the mid-1970s, how should investors be thinking about inflation risk and their real asset allocations going forward? Looking back over the last 100+ years, if the past is prologue, then investors may experience inflationary cycles lasting 3y a bit less than once a decade.
(1913-2024)
Although US headline inflation has moderated since peaking in mid-2022, core inflation has proven sticky, and concern about inflation risk continues to trend higher along with related focus on real assets.
In speaking with institutional investors, there are three general motivations for considering the inclusion of real assets in a balanced portfolio: greater portfolio diversification, as a source of incremental returns, and as a hedge against inflation risk. Indeed, real assets returns are not highly correlated to either stock or bond returns, they tend to co-move with inflation and have relatively stronger returns when inflation is high and rising.
We explore these three motivations for adding real assets to a portfolio, each with a related portfolio construction methodology, and focus on the impact that inflationary regimes have had on portfolio performance.
(2004-2024)
(Annualized, 1971-2024)