GLOBAL – Property and energy infrastructure assets only offer weak or no inflation protection to investors, new research funded by Deutsche Asset & Wealth Management has demonstrated.
According to a paper examining the return on direct investments in real assets by KJ Martijn Cremers of the University of Notre Dame, only commercial real estate was able to prove a real link between inflation and returns.
Cremers' research examined returns on timberland, farmland, infrastructure and commercial real estate in a number of areas, including correlation with other asset classes, downside risk and real assets' ability to hedge against inflation.
The paper concluded that, with the exception of direct investment in timberland, real assets were unable to offset inflation over the entirety of the study from 1978 to 2012.
It added that, for property, the asset's ability to protect against inflation was "quite weak".
"However," it said, "if we consider the 1978-87 (inclusive) time period – which constitutes the only period for which we have data in which there was significant inflation – then we find strong evidence commercial real estate provided some inflation protection."
Cremers warned that the results should be viewed with "significant caution", as his sample only examined quarterly results.
"Nonetheless, the statistical and economic significance of the association between future CPI changes and current appreciations in commercial real estate appraisals is quite strong for this decade for which we have data," he said.
The paper said there was no evidence that direct investment in energy infrastructure, where the sample data started in 1996, acted as an inflation hedge.
It also found that there were "considerable" benefits to investing in real assets, as they acted to lower investment volatility over a 16-year period to 2012.
Whereas a 60/40 portfolio of equities and bonds managed an average return of 8.3% with volatility of 10.5%, a hypothetical portfolio including real assets saw the return boosted on lower volatility.
"As a result, allocating increasingly larger weights towards real assets would have improved the average return with a lower volatility, as illustrated by the figure," the report said.
"For example, a portfolio with 60% invested in the equity/bond portfolio and 40% in the equally weighted real asset portfolio had an average return of 9% per year and an annual volatility of 7.8% over 1996-2012."
IPE and Stirling Capital Partners are co-hosting a conference, Infrastructure for Pension Funds and Other Capital Owners, to take place on 2 October in London. For more information, please visit www.ipe.com/infrastructure.
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