The Long-Horizon Benefits of Traditional and New Real Assets in the Institutional Portfolio

Abstract

This article analyzes the potential role of an expansive set of real asset classes in reducing inflation risk in the portfolios of long-horizon institutional investors. The author proposes a simple model of the evolution of asset returns that can be parameterized by key variables, such as 1) the sensitivity of asset returns to expected and unexpected changes in inflation, and 2) the degree of persistence in inflation. Each of the variables is a significant determinant of the long-horizon inflation properties of assets. Using his model and research, coupled with research available in the academic literature, Martin provides insight into the viability of various real asset classes as potential hedges for inflation.

TOPICS: Real assets/alternative investments/private equity, performance measurement, portfolio construction, risk management