Why invest in real assets?

What are real assets?

At Manulife Investment Management, we think of real assets as tangible investments with intrinsic worth, spanning real estate, land, infrastructure, commodities, precious metals, and natural resources. They're also vital to society—consider how agriculture, timberland, and real estate innately contribute to meeting basic human needs for food, fiber, and shelter, while infrastructure contributes to essential services.

Real assets are diverse, yet they all share two defining features: Typically accessed through private markets, they may therefore provide an illiquidity premium over mainstream public market investments. Secondly, their intrinsic value is rooted in what’s concrete, enduring, and essential, which tends to make real assets less vulnerable to unexpected changes in inflation, consumer preferences, and global growth.

Real assets represent a large and growing investment subset. These assets have become a rapidly growing allocation for investors searching for sources of long-term income, protection from inflation, and reduced volatility. A 2024 real assets study showed that 64% of the pension funds, insurers, and global financial institutions polled expect to increase their allocation to real asset strategies going forward, and many real assets are a natural fit for investors wishing to put their capital to work sustainably in ways that generate a positive contribution to society.

The investment case

Private real assets have long provided investors with sources of diversification, long-term income, and protection from inflation. And relative to public markets, allocating to any one type of real asset within a portfolio may enhance yield profile while reducing price volatility, as real assets tend to exhibit low correlations to other asset classes—and to each other. 

Source: Data for timberland refers to the NCREIF Timberland Index, as of December 31, 2020. Data for farmland refers to the NCREIF Farmland Index, as of December 31, 2020. Data for commercial real estate refers to the NCREIF Property Index, as of December 31, 2020. Data for infrastructure refers to the Burgess Infrastructure Index, as of December 31, 2020. Data for small-cap equities refers to the Ibbotson series IA SBBI U.S. Small Stock TR USD, as of December 31, 2020. Data for non-U.S. equities refers to the MSCI EAFE International Equities Index, as of December 31, 2020. Data for corporate bonds refers to the Ibbotson series IA SBBI U.S. LT Corp TR USD, as of December 31, 2020. Data for U.S. Treasury bills refers to the Ibbotson series IA SBBI U.S. 30 Day Tbill TR USD, as of December 31, 2020. Data for commodities refers to the U.S. Bureau of Labor Statistics, as of December 31, 2020.  The S&P 500 Index series is from Standard & Poor’s Financial Services LLC, as of December 31, 2020. Data for U.S. private equity refers to the Cambridge Associates Private Equity Index, as of December 31, 2020. Data for U.S. forest products refers to the S&P Composite 1500 Paper and Forest Products Index series, as of December 31, 2020.

Investments in real assets have historically experienced low volatility while providing potentially attractive risk-adjusted returns. Effective management of environmental, social, and governance (ESG) considerations helps to minimize investment risk and ensure long-term sustainability of assets. 

Tangible investments with intrinsic value

Below, we summarize four of the more significant opportunity sets for real asset strategies: real estate, infrastructure, timberland, and agriculture.

Real estate investment

Real estate refers to land, structures on the land, air rights above the land, and ground rights below the land. Most investors commonly think about real estate as income-producing structures with contractually obligated rent payments.  Equity real estate investment is typically divided into two main categories: residential and commercial. Equity strategies may range from core to opportunistic and can provide several potential portfolio benefits, including income, portfolio diversification through low correlation with other asset classes, inflation hedging attributes, and downside portfolio protection amid public market volatility.

Real estate investment strategies capitalize on income-growing and capital appreciation opportunities by investing in commercial properties that reflect the evolving needs of businesses, consumers, and occupiers. While some strategies can be very specific, others are diversified across markets, property sectors, and tenants. This not only allows investment managers to take advantage of market trends to generate long-term positive returns, it also diversifies portfolios and offers other significant benefits.

Real estate investments have a long history of generating stable yet appreciating income and capital growth while providing the potential for portfolio diversification and inflation protection. As the global economy continues to grow and evolve, so too should the demand for real estate space.
 

Infrastructure investment

Infrastructure broadly covers companies and assets involved in providing essential services for the movement and storage of goods, people, energy, water, and data. Infrastructure assets include electric, gas, water networks, power-generation plants, highways, railroads, ports, and telecommunication towers, which may benefit from both limited competition and stable consumer demand. As a hybrid asset class, infrastructure assets typically blend some of the most beneficial characteristics of many other investment categories at lower volatility and represent opportunities across the spectrum for risk and return. 

Investments in long-lived infrastructure assets can generate steady cash flows, supported by either long-term contracts or regulated inflation-adjusted rates of return, and tend to demonstrate a greater degree of insulation against macro risks, such as economic recession or unexpected inflation. Such exposure tends to bolster portfolio resilience to market downturns and, as the asset class continues to evolve, technological innovation, intelligent urbanization, and the rise of the network economy are reshaping opportunities for institutional investors.
 

Timberland investment

Investing in timberland involves investing in forests—a renewable resource that integrates planning, growing, managing, and harvesting trees as sustainable fiber and solid wood products to meet a wide range of human needs, including shelter, packaging, and hygiene. Timberland strategies are often diversified across geography, species, age class, and end product. This not only allows asset managers to take advantage of market trends to generate long-term positive returns, it also diversifies portfolios while providing numerous opportunities to reduce greenhouse gas (GHG) emissions and mitigate climate change.

Timberland can provide both current income and capital appreciation, supported by unique characteristics that enable a “store of value” in volatile markets. Timberland investments have long demonstrated strong financial results and can provide portfolio diversification and potential inflation protection while positively affecting global communities through the sustainable management of timberland assets. As nature-based solutions, forests can provide positive social and environmental impacts by sequestering carbon, providing wildlife habitats, and offering other ecosystem services such as providing clean water or recreational opportunities.

Growing global demand for timber provides investors with an opportunity to benefit from favorable supply and demand dynamics, underpinned by strong macro factors, including mitigation and adaptation to climate change. The growing number of corporate commitments to net zero emissions, and global attention to climate change and carbon markets, are creating new opportunities to manage forests for carbon value, as well as for timber value.

Agriculture investment

Agriculture investing is the investment in tangible assets related to crop production, processing, distribution, and marketing, often diversified across geography, crop type, and management style. Investing in core agriculture involves investing in physical assets such as farmland and related improvements, including irrigation systems and grain storage, or in the case of orchards and vineyards, trees, and vines. Farmland is planted, managed sustainably, and crops are harvested and sold as sustainable food and fiber. Investment in vertical integration (also known as farmland plus or core-plus agriculture investing) can reduce volatility relative to crop-only investment and help control third-party processing costs while enhancing crop marketing outcomes.

Agriculture investments can maximize risk-adjusted total return, generate income, preserve capital investment, and realize long-term appreciation, and have a long history of generating strong financial results. The low correlation of farmland returns with returns of other asset classes means that farmland can provide diversification benefits within investor portfolios. Farmland investments may also offer moderate inflation protection.

Farmland, like timberland, is a nature-based solution that can provide positive social and environmental benefits by sequestering carbon, maintaining biodiversity, and contributing to rural economic vitality. As the global population grows, demand for food and fiber is expected to increase. Investors can capitalize on this trend by adding farmland to a portfolio to potentially improve diversification and enhance risk-adjusted returns, while also benefiting from numerous opportunities to reduce GHG emissions and help mitigate climate change.

Sustainable investing for sustainable returns

Real assets are gaining prominence among investors wishing to invest sustainably in ways that benefit our climate and our society. The recognition of the importance of considering ESG factors in investing provides an opportunity for real assets to play a fundamental role in sustainable investment for a better world. It’s clear that real assets can provide solutions for three of the world’s greatest challenges: climate change, nature loss, and rising inequality. 

As long-term investors in real assets, we've long recognized the link between environmental and financial stewardship. To us, strong stewardship is inseparable from good investing since it encompasses the activities that not only protect the health of individual investments, but also those that foster the strength and sustainability of the systems on which those investments depend.

Long-term experience of both investing in and operating real assets allows us to embed stewardship in how we manage our operations, make investment decisions, and develop and offer financial products and services, including nature-based solutions to combat climate change. 

"Without strong stewardship, an investment’s integrity can be compromised; in turn, the asset manager/asset owner relationship can suffer, and the smooth functioning of financial markets can break down." 

Source: Stewardship report 2021, Manulife Investment Management.

Manulife Investment Management invests and operates assets in our real estate, timberland, and agriculture portfolios, while seeking to raise the bar of sustainable investing and stewardship, thereby enhancing the value of the assets and having a positive impact on our stakeholders. In our infrastructure investments, we focus on building strong relationships with companies, sponsors, and co-investors, which enable a meaningful approach to sustainability and enhance our influence over key assets and portfolio companies. And we’re accelerating the pace of innovation around developing products to solve investor needs and help create a more sustainable future.

Risks of investing in real assets

Since many are not publicly traded, real assets' principal risks are centered on illiquidity, including transparency and price discovery as they don't change hands frequently, and their values are appraised only periodically. Moreover, alongside growth in interest from investors, we’re likely to see increasing regulatory and transparency requirements governing private investment structures as these investments become more mainstream. Investors in private real assets can benefit from investment managers with in-depth experience of these highly individual markets, combined with a disciplined risk management process that’s focused on the investor's unique demands. A well-diversified selection of private markets investments can reduce portfolio volatility, and most risks associated with real asset investing can be managed through diversification, careful planning, analysis, and due diligence, including evaluation of ESG considerations. 

Outlook

In an environment of historically low expected returns from public markets, the hunt for nontraditional sources of current yield and capital appreciation continues. Alternative sources of income are becoming increasingly important as more investors discover that debt just doesn't yield enough to meet their portfolio distribution needs.

We believe that private real asset investments, offering potentially stable yields and attractive diversification from public market investments, are well placed to bolster portfolio resilience and generate robust investment income. And given investors' growing concerns about sustainability—an area that real assets are exceptionally well positioned to directly address—we expect strong demand growth for private real assets to continue.