Following the recent launch of its S&P Real Assets Index, S&P Dow Jones has issued a report examining the potential benefits of allocating to real assets. The report, entitled “Let’s Get Real About Indexing Real Assets” and authored by Jodie Gunzberg, Global Head of Commodities & Real Assets at S&P Dow Jones, highlights how real assets offer an effective means of reducing risk, enhancing diversification and achieving inflation protection.
Unveiled on 31 December 2015, the S&P Real Assets Index measures the performance of real assets including global property, infrastructure, commodities, and inflation-linked bonds by using liquid and investable component indices that track public equities, fixed income, and futures. By using liquid and investable component indices, the index is suitable for use as an underlying reference for exchange-traded funds.
Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones.
Real assets are considered distinct from financial assets, which derive their value from a claim on other assets. In comparison, real assets get their value from their own intrinsic and inherent qualities; examples include property, commodities, agricultural land, natural resources, and Treasury Inflation-Protected Securities (due to the ‘risk-free’ credit guarantee of government securities).
Historically real assets tend to perform relatively well during periods of market stress and, as such, are suited as a risk management tool. In the past five years, investments in real asset strategies have increased over 325% due to a greater appreciation for this benefit following the global financial crisis.
The S&P Real Assets Index tracks an extensive set of real assets using liquid and investable component indices that track public equities, REITs, fixed income securities, and futures. The component indices (and their index weights) are:
Dow Jones Global Select Real Estate Securities Index (20%)
Dow Jones Brookfield Global Infrastructure Composite Index (20%)
S&P Global LargeMidCap Commodity and Resources Index (7.5%)
S&P Global Timber & Forestry Index (2.5%)
Dow Jones Commodity Index (10%)
Dow Jones Brookfield Global Infrastructure Broad Market Corporate Bond Index (15%)
Dow Jones Global Select Real Estate Securities Corporate Bond Index (5%)
S&P Global LargeMidCap Commodity and Resources Corporate Bond Index (15%)
S&P Global Developed Sovereign Inflation-Linked Bond Index (5%)
Based on back-tested data, the index exhibits a number of favourable portfolio characteristics. These include (i) lower volatility – real asset equities have 10-year annualized volatility of 17.1%, but adding bonds and commodity futures reduces the volatility to 11.7%; (ii) inflation protection – the index has an inflation beta of 4.2 and correlation of 0.43 to inflation; (iii) enhanced diversification – moving from 100% equities to a mix of 50% equities, 40% bonds and 10% real assets increased the sharpe ratio from 0.47 to 0.70; and (iv) downside protection – during the global financial crisis (October 2007 – February 2009) the drawdown in equities was 51.4% versus 36.9% in the index.