Real Assets Adviser, a publication of Institutional Real Estate, Inc., is edited exclusively to meet the real asset-related information needs of members of the U.S. private wealth advisory community.
The monthly magazine invited Stephen Blum to write an article on constructing a real assets portfolio. The following is Steve’s article which was published in the September, 2019 edition.
Constructing a real assets portfolio
A nuts-and-bolts primer on why investors should include real assets in a multi-asset portfolio, and
how to construct and diversify the real assets portion of the portfolio.
Constructing portfolios that have a good chance of performing well over the next ten years has become much more difficult. Stocks and bonds are both near all-time highs and market volatility has increased dramatically. Prolonged low interest rates have made is necessary to take on more risk to meet target income requirements. Including alternative and real assets with limited liquidity in portfolios can help long-term returns, reduce volatility, and increase yield.
Our typical target allocation to alternative and real assets is one third of the portfolio. We break these investments down into four categories: private equity, private real-estate, private credit, and “other”” We tend to shy away from the multi-billion dollar funds as they are required to deploy large amounts of capital quickly and cannot be as selective as smaller funds. We also try to minimize the correlation between the investments we select. Ultimately, it is hard to know what will turn out to be a profitable investment, so we focus on funds with lower investment minimums to keep position sizes small and achieve greater diversification.
Conducting proper due diligence on non-traded alternative and real asset investments is a serious undertaking. It is necessary for advisers to look past the slick presentations, steak dinners, and entertaining events. These offerings are often complex investments requiring considerable expertise and experience to properly evaluate for inclusion in client portfolios. Networking with other advisers experienced in this space can help guide you through the due diligence process, leading you to better investment selections.